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Natural gas pricing in IndiaCurrent policy and potential impact
2 Natural gas pricing in India Current policy and potential impact
Current scenario in India’s natural gas market
Intricacies of natural gas pricing in India
Potential impact of new pricing on energy industry Co
nten
ts
3Natural gas pricing in India Current policy and potential impact
Current scenario in India’s natural gas marketChapter 1
India’s natural gas consumption far behind the global average1
India’s expanding economy and growing population have led to increased consumption of primary energy resources such as coal, oil and natural gas in the country. In line with this, its primary energy consumption grew at a compounded annual growth rate (CAGR) of 6% to 563.5 million tonnes of oil equivalent (MTOE) in 2012 from 420.1 MTOE in 2007. The share of natural gas in its primary energy mix increased marginally from 8% in 2008 to 8.7% in 2012. This is fairly low, compared to the global average of 24%, primarily due to supply-side constraints. Furthermore, in terms of individual consumption, India’s annual gas consumption of 44 cubic meters (cm) per capita is far behind the global average of 470 cm per person.
Figure 1: Low consumption of natural gas in India, 2012
-500
0
500
1,000
1,500
2,000
2,500
3,000
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
Per c
apita
gas
con
sum
ptio
n, c
ubic
met
er
Gas share in energy mix, %
Source: BP Statistical Review of World Energy 2013, The World Bank and EY analysis
ChinaIndia
BrazilFrance
Singapore
South Korea
Australia
GermanyJapan
Canada
US
UK
Turkey
Malaysia
Russia
reliance on imported LNG
production and an inadequate transmission and distribution infrastructure. Domestic
output has been steadily declining after reaching 60 million standard cubic metres per day (mmscmd) in 2010, and has hit a trough of 12 mmscmd in 3QFY142. According to Reliance Industries Limited (RIL), the fall in KG-D6’s production is mainly due to
to the demand from the power and fertilizer sectors, and cumulatively accounted for more than 61% of gas consumption in FY13. The demand is also driven by its growing
4 Natural gas pricing in India Current policy and potential impact
and petrochemicals. Rising concerns on carbon emission have also contributed to the demand for natural gas in the country.3
4 According to the BP Statistical Review of World Energy 2013, India is the world’s fourth-largest
despite rising production and import of gasOver the next few years, the shortfall in natural gas production in the country is expected to continue with its supply trailing demand. Shortage of gas is likely to reach its peak in FY15, with around 37% of the demand being unmet.5
expected to remain the anchor segments that consume natural gas and are likely to account for around 68% of the total demand for it in FY17. Furthermore, deregulated pricing of petroleum products and an increasing focus on addressing environmental concerns are expected to drive the demand for natural gas from industrial users,
price-sensitive and will depend on the price affordability of end users, especially in the power and fertilizer sectors.6
Figure 2: Future natural gas demand-supply scenario (mmscmd)
Source: Ministry of Petroleum and Natural Gas
87 87 129 150149 170 177 209371 405 446 473
135148 140
114
FY14 FY15 FY16 FY17
LNG imports
Domestic production
Natural gas demandDe cit
of 15% from FY14 in India. Most of this incremental supply is expected to be met
increase to 150 mmscmd in FY17, contributing around 42% of the total supply.
Domestic production is expected to increase at a CAGR of around 12%.7 This is likely to come from new discoveries which are currently under development, expectation of partial recovery in the output from KG-D6 and increased production from unconventional sources, particularly coal bed methane.
5Natural gas pricing in India Current policy and potential impact
Intricacies of natural gas pricing in IndiaChapter 2
complex and heterogeneousThere are multiple natural gas pricing regimes in India. These can be divided into the following:
Administered Pricing Mechanism (APM)
APM gas pricing:
fertilizer and power plants, court-mandated customers and those requiring less than 50 thousand standard cubic metres per day (mscmpd) at APM rates. The price of APM gas has been set by the Government on a cost-plus basis and is US$4.2 per mmbtu in
APM price elsewhere in the country (the balance 40% is paid by the Government to 8
India’s move toward a market-based pricing regime: In June 2013, the Cabinet Committee on Economic Affairs (CCEA) approved a market-based pricing formula for produced natural gas produced in India. The revised prices are based on recommendations made by the Rangarajan Committee. The pricing formula, valid for
up from US$4.2 per mmbtu currently. The upward revision in prices is based on the
are calculated on a trailing 12-month basis. Prices will be revised every quarter.
Non-APM gas pricing: for which prices are determined by the market, and (ii) domestically produced gas from
Pre-NELP PSC pricing: This is applicable for gas produced from in Panna-Mukta,
NELP gas pricing:price of gas is determined on the basis of arm’s length prices (market prices), subject to the Government’s approval, and is controlled by PSC terms. This pricing regime was valid until March 2014. After this, a new pricing mechanism has come into force, based on the Ranagrajan Committee’s recommendations. Currently,
Price of imported gas (LNG): been linked to Japanese Custom Cleared (JCC) prices and varies on a monthly basis for
its demand sees limited growth from this source. According to industry estimates, the
spot price was at around US$18 per mmbtu in January 2014 .
6 Natural gas pricing in India Current policy and potential impact
Potential impact of new pricing on energy industry
Chapter 3
Overall, the new gas pricing policy augurs well for India’s natural gas market. It is expected to increase domestic production by encouraging upstream investment. This will improve India’s energy security and increase availability of gas for its key gas-consuming industries.
So far, the gas market has been adversely affected by the Government’s current gas-pricing policy and investment in the upstream sector declined to US$1.8 billion
to the on-going General Elections in the country, is expected to increase certainty and transparency in pricing of natural gas in India.
Upstream sector
The increase in natural gas prices is expected to encourage investment in the upstream segment and boost production. It will also improve the commercial viability of
US$12 per mmbtu due to the factors mentioned above.10
11 According to Morgan Stanley, gas prices of more than
12
The proposed hike in gas prices will help to boost the revenues of indigenous gas
domestic gas. According to Moody’s estimates, the proposed increase in gas prices
US$500 million in FY15.13 Furthermore, the rise in gas prices will augment the
Increased production of gas will help to alleviate the existing supply crunch, and reduce the country’s reliance on high-priced LNG. However, price-sensitive sectors
there is a need for the Government’s policy to effectively address the concerns of the consuming sector.
7Natural gas pricing in India Current policy and potential impact
Power sector
The power sector is the largest consumer of natural gas in India. Gas-powered power plants are plagued by high generation costs and a low average plant load factor (PLF).Currently, around 6,000 MW of commissioned and 1,000 MW of un-commissioned
non-functional due to unavailability of gas. While the new pricing regime is expected to increase domestic gas supply, which can be used to bring these power plants on stream, the demand for natural gas for gas-based power generation remains highly price-sensitive. Power plants are currently being supplied APM gas at US$4.2 per
players. The increase in gas prices to US$8.4 per mmbtu is expected to result in a rise
the companies to switch from natural gas to coal due to high conversion costs, a longer gestation period, their reliance on imported coal and environmental constraints14.
Fertilizer sectorIn the case of the fertilizer sector, another major consumer of gas, increased gas prices would result in a rise in feedstock costs and working capital requirements.
8 Natural gas pricing in India Current policy and potential impact
the fertilizer industry, since it enjoys a top priority position for allocation of gas.15 In .
According to a report submitted by the Government’s Parliamentary Standing
every rise of US$1 per mmbtu in gas prices. Consequently, this would lead to an increase in the Government’s subsidy burden. An increase in gas prices to around 8.4
billion). This subsidy burden can be offset by additional revenues received by the
operations expected in development of new gas resources.
The CGD sector is another key consumer and has witnessed rapid growth in recent years. The sector will continue to create a demand due to the addition of gas networks
will increase sourcing costs for CGD companies with a high APM gas allocation. CGD companies are expected to witness a decline in their earnings due to an increase in their input costs. These companies are unlikely to pass on the increase in gas prices to industrial and domestic consumers due to their limited headroom with alternative fuels
since the cost of sourcing is dollar-dominated16. Overall, increased availability of
Petrochemicals and other consuming sectorsThe petrochemicals sector uses natural gas to extract ethane and produce polyethylene, propane and butane for production of LPG. Input costs account for around 80% of manufacturing costs. Increased gas prices would mean reduced
such as ceramics and glass, since their input costs are also likely to go up with the price revision. On the other hand, companies that have replaced expensive fuels such as
gas prices, since the sector meets most of its demand from imported gas or naphtha.
9Natural gas pricing in India Current policy and potential impact
1.
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8. 16 April 2014.
Moneywise Media Pvt. Ltd.
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11. 2013 Reuters Limited.
12. �Research.
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References
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old proactive and dynamic multi-State apex organization working at the grass-root level and with strong national
and Central Indian States along with Bihar, Jharkhand in the Eastern region and UT of Chandigarh. It has direct
acts as a catalyst in the promotion of industry, trade and
based policy advocacy role, positively impacts the economic growth and development of the nation.
We are globally connected through institutional linkages with over 60 important foreign Chambers of Commerce. Government of India has authorised us to issue certificate of origin (non-preferential) to Indian exporters. We also attest commercial documents of various types. Recommendation letters for visas for business promotion to foreign diplomatic missions in India are also issued for representatives of Indian companies.
In its endeavour towards capacity building in the country,
development training programmes in cooperation with the Konrad Adenauer Foundation of Germany. Through the support of its members, the Chamber has been regularly contributing in cash and kind towards relief and rehabilitation of the victims of natural calamities and disasters. In keeping with the motto adopted 'Ethics
Excellence annually.
Delhi and Chandigarh provide modern conferencing and catering facilities for corporate events, board meetings, training programmes, etc. With a modern auditorium, several conference and meeting rooms to suit different requirements and also a business centre, while the ambience is international, the cost is economical.
