-
How will high global natural gas prices affect India?
Ahead of the winter, Europe is making desperate attempts to purchase natural gas from sources other than Russia, putting Asia in a tight spot. What does it mean for India? Let us find out.
Why do we need natural gas?
Natural gas is used to generate electricity and make fertilisers. It is also converted into CNG which is used to run automobiles. It is converted to LNG and is imported by countries to meet their energy requirements. So natural gas is as essential as oil.
Why is it in short supply?
Russia was the largest exporter of natural gas in 2021. But its invasion of Ukraine changed the equations, and plunged Europe into an energy crisis. And the effect of Europe’s energy crisis is slowly being felt in India too. It is threatening to derail its gas economy.
Russia used to supply 40% of Europe’s gas requirement before the Ukraine invasion, but it came down to 9%.
Gas supplies to Germany were also hit as Russia cited Nord Stream 1 maintenance. The pipe, which runs under the Baltic Sea, is Germany’s gas supply backbone and accounts for over one-third of Europe’s gas supplies.
This means that Europe is looking to get gas from other sources, which leaves very little for Asia. For instance, Russian gas producer Gazprom’s supply to India has been dwindling since the start of the war.
Europe is now expecting 90% more LNG on the spot market than they have secured under long-term contracts. Compared with last winter, European LNG imports are expected to be up 16%.
So the spot LNG prices have soared and hit price-sensitive emerging markets badly. European gas futures are more than four times the price a year ago, according to ICE data. Europe’s TTF gas futures benchmark, a gas trading platform in the Netherlands, went as high as €346.5 per megawatt hour (Mwh) on August 26, jumping over 23 times from Covid-affected October 2020.
According to reports, India is now looking for alternatives and has reached out to Iraq, Saudi Arabia, UAE, and the US to secure liquified natural gas (LNG) at affordable prices. Although the price declined towards the later end of September, it was still 27 times more than what Indian importers paid for spot supplies of the fuel in late 2020.
In India, spot LNG prices were around Rs 742 per million British thermal units at August end, 135% higher than a year ago and 285% higher than two years ago.
According to analysts, strong demand for LNG will make it difficult for India to compete in the global natural gas market. Matthew Carr, head of CarrZee, a London-based clean energy intelligence provider, said that crazy high prices will slow the developing world’s attempt to improve access to energy and electricity. Research analyst Sumit Pokharna tells more
Sumit Pokharna, Research Analyst and Vice-President, Kotak Securities says 50% of India’s gas requirements is met from imports. Situation may get grave in the coming winter. Double whammy is that rupee has also depreciated.High gas prices have dent India’s imports as Europe is sourcing most supplies by paying record prices ahead of the winter. In April-August period, India’s LNG imports fell 10 per cent. Domestic natural gas production rose to 34 billion cubic meters in FY22, from 28.3 billion cubic metres in FY21.
Gas consumption too fell by 10 per cent in August from a year earlier. In the first quarter of current fiscal, gas consumption fell 2.5 per cent. India’s gas consumption is largely accounted by fertilisers, city gas distribution, power and other sectors.
Meanwhile, in India, local gas prices, which are revised twice every year, are linked to global benchmarks. So, higher global benchmark prices mean that domestic prices would also rise. In line with that, the price of natural gas has been raised by 40% to a record high last Saturday.
The record high local natural gas prices are likely to make CNG and PNG cost more. PNG prices have already risen 70 per cent in the last one year. According to a report in the leading financial daily, Indian automakers have cut their production target for CNG-powered vehicles by 25 to 30 per cent. City gas distribution companies are deliberating whether to pass on the cost or absorb it and worried that the hike would impact sales volume, due to lower offtake by industrial units. At present, around 85 per cent of city gas distribution segment consumption is being met through domestic gas and the rest through imports. Research analyst Sumit Pokharna tells more.
Sumit Pokharna, Research Analyst and Vice-President, Kotak Securities says government could have deferred the price hike. The current hike will add to India’s inflation. CGD companies may have to increase CNG prices.
Meanwhile, the steep hike in gas prices is expected to increase Centre’s annual fertiliser subsidy bill. According to a Business Standard report, the fertiliser bill was estimated to have last risen to Rs 2.3 trillion as against budgeted Rs 1.05 trillion. On the upside, the rise in gas prices will likely boost earnings of ONGC, the key producer of domestic APM and others like Oil India.
Going forward, as we head towards winter, the gas prices are expected to remain elevated, impacting margins of CGD players and adding to inflation. In the longer term, India may need to expedite its shift to alternative sources of energy and reduce dependence on hydrocarbons.
Share This
