• Gas pricing formula needs a revisit

    The current pricing formula does not incentivise the producers. A review is needed to up gas’ share in the energy mix. If India wants to make natural gas one of its major sources of fuel then it may need to take a relook at its existing domestic gas pricing mechanism.

    Today, gas price in the spot market is around $47 per mmBtu (gas is measured in million British thermal unit), long-term contracts which India has entered into is around $19/ mmBtu, Non APM (non-administered price) domestic gas is at $10/mmBtu and APM (administered) domestic $6/mmBtu. Though India sources most of its LNG (liquefied natural gas) through long-term contracts, price in such contracts is also subject to market conditions.

    Supply disruptions

    Recently at the media and analyst call of Reliance Industries Ltd’s first quarter 2022-23 results, Sanjay Roy, Senior Vice President – E&P, Reliance Industries Limited, had said, “…Just to give you a perspective on global gas markets, as you all know, the gas prices continue to remain elevated. There are two major drivers, one is European demand now shifting from Russian gas to LNG supplies, and which also impacts the Asian consumers. Also, there’s been supply destruction. As, we’ve seen the Freeport LNG terminal in the US, as well as the Nord Stream one pipeline disruptions. So, that’s a substantial amount of volume that has been impacted…”

    “In terms of the Indian gas market the outlook remains robust and one of the big reasons is the availability of the domestic gas. Because the domestic gas particularly like in KG-D6, where there is a price ceiling and that is much in demand as compared to the market prices that are currently prevailing at these times.

    “Now, in terms of price ceiling, as you all are aware and I mentioned earlier, the price must move up and we will see higher realisations. It is expected that based on higher energy prices this will go further up,” he said adding, “Now, we do see that the domestic price ceiling remains disconnected, whether the prices are elevated or when prices fall. And you know we are continuing our advocacy for removal of ceiling prices. Overall, we expect higher gas price realisations in FY23 and in the quarters to come.”

    Pricing problems

    Roy is not the only one talking on these lines. Recently at an event former Petroleum Secretary and currently Chairman of Hindustan Oil Exploration Company (HOEC), Vivek Rae, opined that the gas pricing policy in India has to be fixed and the 2014 formula has to be done away with.

    Rae had said that the current formula is “myopic” and does not incentivise gas producers. In India, gas penetration in its energy mix is 6 per cent as against a global average of 23 per cent. The objective is to improve this number to 15 per cent over the next few years.

    India’s gas price is determined at an average price of LNG imports into India and benchmark global gas rates. According to industry, India is simply underpricing a scare resource. “At current prices, you are penalising the producer and somehow the consumer trumps the producer,” he had added.

    “…We are benchmarking our resource price based on the price in countries where the resource is not scarce,” he explained.

    Market dynamics

    Let us look at the gas market in India. Total consumption in India is 175 million standard cubic metre a day (MMSCMD), of this 93 MMCMD is met through domestic production and 82 MMSCMD through LNG imports. Gas consumption is directly linked to supply availability.

    The industry fears that the world’s third largest energy consumer could see its natural gas consumption decline from the current levels if LNG (imported gas) prices in the international market continue to rule in the range of $45 an mmBtu.

    At a post results media interaction Petronet LNG Chief Executive Officer AK Singh, elaborating on the impact of high prices on demand, said, “India is fortunate enough to have a good portfolio of long-term contracts.” But, due to high volatility and prices, the increase in demand is not happening, though demand destruction here is not to the extent that people in other parts of the world are experiencing, he added.

    “With gas prices moving up in this fashion, to sustain consumption in this situation is in itself a challenge. Growth comes when prices stabilise. Considering the geopolitical situations, we do not foresee that immediately growth will start,” he had pointed out.

    Formula review

    What India needs to do to have a mature gas market is to review is its existing formula. Currently, India revises its domestically produced gas price on a half yearly basis based on a cocktail formula worked out considering the volumes and prices prevailing at major international markets such as Henry Hub, National Balancing Point, Alberta and Russia.

    According to the government, the formula was finalised considering the requirements/interests of producing and consuming sectors. The prices are notified after every six months in accordance with said guidelines.

    The argument put forth is that the formula is based on markets which are either very matured or are themselves producers and not exactly India-sepecific. If the government wants to promote the gas market then such economic transformation would be not be possible without proactive and sustained policy support from the governments and regulatory authorities in these countries.

    In India, Gujarat has shown how one can expand to gas economy, and other States can follow. India has set the target to raise share of natural gas in energy mix to 15 per cent by 2030, and to attain this, the entire eco-system needs to be addressed.

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