Natural Gas The Effect of New Gas Pricing Guidelines in India

Editor: Dominik Stephan

The Government recently approved new Gas Pricing Policy Guidelines which generated a large scale interest among various stake holders. To provide further clarify on the subject and to explain the rationale behind this decision, following points would serve as Ready Recknor on the subject.

(Picture: PROCESS)

New Delhi/India – The Cabinet Committee on Economic Affairs recently (28.6.2013) decided to review the domestic natural gas price policy on the basis of recommendations made by the Dr Rangarajan Committee constituted by the Prime Minister in May, 2012. Accordingly, a new domestic natural gas pricing guidelines2013 has been approved, which will be applicable to all natural gas produced domestically and to all consuming sectors informally.

These guidelines shall apply from 1 April 2014 and shall be applicable for five years after which the market discovery price could be adopted as per the road map being prepared by the Dr Kelkar Committee.

Fixed Price for Domestic Gas on Import Csts

As per the Rangarajan formula, the price will be fixed on the basis of the average of net back price of Indian gas imports and also the weighted average of the price at international hubs. The underlying principle is that the Indian producer should get a similar price what the gas producers elsewhere are getting.

On the basis of the said formula, the price for natural gas in India for the quarter April–June 2013 comes to $6.83 per MMBTU. During the course of circulation of the Cabinet Note, the Planning Commission suggested a price of $11.18 per MMBTU, Ministry of Finance $6.99 to 8.93 per MMBTU, Department of Fertilizer $6.68per MMBTU, whereas Ministry of Power opined that we should stick to the present cost plus regime which comes to around $4.14per MMBTU.

The History of India's Gas Market

The domestic oil and gas sector is mainly administered under New Exploration Licensing Policy (NELP) introduced in 1997 by the United Front Government and the first round of bidding was announced by NDA Government in 1999. So far, nine rounds have already taken place.

However, the performance of the NELP Blocks has been far from satisfactory due to a variety of reasons which is evident from the fact that out of 110 discoveries announced under NELP; only six are presently under production.

Domestic gas Producer Call for Higher Prices

As per the production sales contract signed by the Government with the selected contractor, the sale of gas is to take place at competitive arm’s length price discovered by the contractor and approved by the Government. Accordingly, the present price of $4.2per MMBTU was fixed in 2009 which is applicable till March, 2014.

However, the price of $4.2 per MMBTU is not found to be viable for sustenance of the domestic production of gas and all the operators are demanding increase in price. The Gujarat State Petrochemical Corporation (GSPC) owned by Government of Gujarat has been demanding a price of $13–14 per MMBTU for their blocks in KG D-6 basin. Similarly, Reliance Industries Limited (RIL) has also been asking a price in the same range. Even the Public Sector Undertakings such as ONGC and Oil India Limited have been repeatedly representing for increase in gas price as the production will not be viable at any price less than $7.

India's Gas Output Declines Sharply

The domestic gas production in the country has been falling drastically short of the demand and the present deficit of 142.78 SCMMD is expected to increase to around 234.26 SCMMD in 2016–17. Therefore, there will be huge dependence on the import of gas at much higher price of around $14 per MMBTU and above, which will simply become unaffordable for consuming sector. Moreover, the Economy cannot afford to continue with such a huge Import Bill which is around 160 billion US$ for the import of petroleum products. As per a reliable estimate, the subsidy burden to meet core sector demand through imported LNG can go up to as high as Re 1,20,000 crore, if the demand is not substantially met by domestic gas.

One of the main reasons for weak domestic gas production sector is viability of the production vis-à-vis price of the gas at which the producers are supposed to sell. The present price of $4.2 per MMBTU has not been found to be feasible and the Ministry is not approving the development plan for the lack of commercial viability. Around 3 TCF of gas reserve is waiting to be exploited.

Where is the Money?

The investment in exploration and development plan consistently going down from $6 billion in 2007-08 to around $1.8 billion in 2011-12. At the same time, Indian Companies have already invested $27 billio nin the E&P Sector abroad and the remaining $10 billion is in pipeline.

It is important to note that every $1 per MMBTU increase in the gas price would result in an additional burden of approximately $1 billion. However, half of it i.e., around $500 million will come back to the Government in the form of royalty, profit, petroleum taxes and dividend. This additional income can take care of the additional subsidy burden of fertilizer and LPG, if the Government decides to absorb the burden.

Gas Based Power Plants on Hold

With regard to the Power Sector, around 16000 MW Capacity is stranded for want of gas supply. Apart from the high import price of the gas, the import infrastructure is also insufficient to meet the requirement and therefore, if domestic gas supply is not restored to the Power Sector, the huge investment made on the gas based Power Plant will go waste.

With regard to alleged windfall gain to the private operators, more than 65 per cent of the domestic gas production is by the public sector companies and the remaining 35 per cent by the private or joint venture companies between public sector and the private sector. As regard to RIL, presently it is producing only 10 per cent of the gas production in the country. With the new price, it is expected that their production from KG D-6 will increase with the additional investment. However, the gas flow is not likely to start before 2017–18 and therefore, allegation of any windfall gain is misconceived.

Gas Prce Revision to Trigger Investments in India, Analysts Say

In view of the above, it can be concluded that revision of the gas price is the most economically prudent decision taken by the Government which is likely to trigger additional investment, additional production, reduction of import dependence, and therefore, better fiscal balance. Increased availability of domestic gas is also likely to result in affordable production by the consuming sector such as Power and Fertilizer. In any case, as indicated by the Finance Minister, the Government has revised the output price of the domestically produced gas and its impact on the increased input cost for certain sectors would be looked into by the Government separately.

Apart from the gas pricing, the Government in the recent few months, has also taken a number of measures such as approval of exploration in the mining lease area, clearance of all pending administrative issues and the management committee resolutions (around 200 such issues were pending and even approved management committee resolutions were not signed since last 1 to 5 years), clearance of 30 Blocks from Ministry of Defense, aggressive acquisition of oil and gas assets abroad, formulation of Shell Gas and CBM Policies, etc. These steps along with the right gas price would certainly result in increase in investment in the oil and gas E&P Sector and substantial boost to the domestic production.