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Issues Related to Natural Gas Pricing in India

Prepared By: Vishwa Mohan Mishra

Natural Gas, as we can say, can be considered as the fuel of the future. Though it has yet to compete a lot in the market but still the global scenario indicates so. Natural gas is considered a clean fuel i.e. it gives out fewer pollutants in the environment on combustion as compared to coal, oil and hence is considered an environmental friendly fuel. Outside India people are rapidly shifting to this friendly fuel but within country it still has a long way to go. In this write-up I would like to bring into picture the issues related to natural gas pricing that need to be taken care of in order to promote usage of natural gas in India.

Natural Gas in India

India has a natural gas reserve of about 44 trillion cubic feet with the consumption of about 5.3 bcf/day , 3.9 bcf/day of which is produced domestically a . The remainder of gas consumption is imported in the form of LNG. Currently India is the fourth largest importer of LNG which provides for one fourth of natural gas demand. With the increasing demand of petroleum products in India it is expected that the natural gas demand will rise to about 165 bcm by year 2016 b . With this the dependence of India on expensive LNG is bound to increase which will not only affect the natural gas prices in country but would also affect the sectors depending upon it.

country but would also affect the sectors depending upon it. India’s natural gas pricing regime can

India’s natural gas pricing regime can be broadly divided into three categories i.e. APM gas, non- APM gas and LNG gas. Further it includes subdivisions such as subsidized gas given to power and fertilizer sectors, gas given to North Eastern States at a cheaper price etc. In 2012, there were at least twenty-five different prices of natural in India governed by different price regimes mentioned above. Pricing of major share of gas supplies in India is regulated which discourages investment in the domestic sector by foreign players in India and reduces competition. Besides this the price of imported LNG is high which makes it further difficult for different sectors to include imported LNG in their gas sourcing portfolio. At present the domestic natural gas is available at a price of 4.2 $/mmbtu while the term LNG ranges from 9-10.5 $/mmbtu, much costlier than the domestic gas c .

Indian government has agreed to change the pricing formula which will bring the price of domestically produced natural gas to 8.4 $/mmbtu. As per the new formula the domestic price will reflect the trailing 12-month average of the volume-weighted netback prices of India’s LNG imports and the volume-weighted price of the US’ Henry Hub, the UK’s National Balancing Point, and Japan’s Japan Crude Cocktail price. This change in price will provide incentive to companies to get involved in exploration activities and would help in boosting production. With the increased price more reserves will become feasible increasing the natural gas reserves of India by 35 tcf. However this is only one side of the picture.

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Power and fertilizer sectors are the two most important consumers of natural gas in India. An increase in price of natural gas will affect the natural gas power plants that do not have the ability to pass on the additional cost to the consumers. On the other hand there would be an increase in the subsidy related to fertilizers with the increase in price. Every US dollar increase in gas price will lead to a Rs. 1,370 per tonne rise in urea production cost and 45 paise per unit increase in electricity tariff d . Besides this the price increase would also affect the CGD products making it difficult for them to compete with the traditional fuels. Further with fertilizers and power sector enjoying first priority over the domestically produced gas, the other sectors which can provide high return have to depend upon LNG thus reducing the returns.

At this juncture it is, thus, important to understand that upstream price reforms will not solve the problem alone, downstream price reforms are also required. It is necessary for the country to gradually reduce the subsidy provided in different sectors and to shift to market determined pricing. Subsidy encourages waste of energy resources and increases the fiscal deficits of the country. The removal of subsidy will bring in competition in the sector which will further help in infrastructural developments in the gas sector.

Though the current government has agreed to continue with the gradual deregulation of diesel of 50 paisa per month and has refused to increase the price of LPG and kerosene, ministry has already started taking steps towards reducing subsidy burden. Oil minister has directed state refiners and explorers to urge their employees to voluntarily opt out of subsidy. Another step taken by ministry includes the plan to launch a portal named “mylpg.in” with the help of which citizens would be able to opt out of cooking gas subsidy easily e . It is these gradual steps that can help in reducing the subsidy burden for the country. Such steps will help natural gas to compete in the market. It would help in encouraging efficient use of our resources and provide a boost to the economic development of the country.

a The Geopolitics of Natural Gas Natural Gas in India: Difficult Decisions Harvard University’s Belfer Center and Rice University’s Baker Institute Center for Energy Studies October 2013

b Oil & Gas, India Brand Equity Foundation, March 2014

d The Economic Times, “Gas price revision can happen even before October 1: Dharmendra Pradhan” July 5 2014,

e The Economic Times, “Oil ministry directs oil companies’ to urge their staff to give up subsidised LPG cylinders”, July 5 2014, http://articles.economictimes.indiatimes.com/2014-07-05/news/51092117_1_lpg-subsidy-subsidised- lpg-cylinders-subsidy-scheme

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