From Turbulence to Streamline:
Natural Gas Pricing in India was in a turbulent mode till 2014 due to the various pricing regimes existed at that time. Natural gas market in India started with its supply by OIL in 1959 and ONGC in 1964. During 1960’s it was a buyers market where supplies were based on the negotiations between oil companies and its customers. From 1976 the supplies were linked to alternate fuel parity (Coal) prices where coal was the major alternate fuel used by natural gas consumers. But with the expansion of natural gas usage to more number of consumers using various alternate fuels like naphtha and furnace oil, natural gas prices started linking to the thermal equivalence of alternate fuels used by various customers from 1978. By the mid of 1980’s, the market saw a transition to seller’s market due to additional availability of natural gas, increased marketing efforts by the oil companies and inherent advantages of natural gas compared to other fuels. GOI fixed uniform gas price in 1987 based on the long term average cost of production regardless of the end use and the location of the customer (along HBJ Pipeline). Government realized that the ad hoc pricing system was not suitable for Indian gas sector and set prices based on Kelkar Committee recommendations from 1992. The PSCs of Panna, Mukta, Tapti and Raava were executed on 1994 where its gas prices were linked to internationally traded fuel oil. By 1997, government introduced a pricing system where natural gas was priced as a percentage of fuel oil taking into account of Shankar Committee recommendations and GOI pricing reached its price ceiling by 1999. LNG finds its way to India during 2004 where its pricing is done on the basis of the contract signed between buyers and sellers. Till 2005 the domestic gas price didn’t change and by 2007 commercial production of CBM started where price was fixed based on arm’s length pricing as per the CBM contract. From 2009 onwards NELP gas finds its way to Indian Natural gas market with Market determined pricing duly approved by EGoM. During 2010, GOI revised the APM price to $4.2/mmbtu which remained same till 2014 before it was revised with the New Domestic Natural Gas Pricing guidelines which puts all domestically produced natural gases under one pricing regime. This pricing was common across the country except a subsidy was given to consumers in North East to improve their existing economic infrastructure. The transition of Indian Natural Gas pricing till 2014 is shown in Exhibit 01.
Before and After November ‘14:
Before November 2014, there existed different prices for domestically produced natural gas in India. The different domestic natural gas sources and their pricing mechanism are given below.
- APM Gas – GoI determined
- Non APM Gas – Market Determined Pricing
- Pre-NELP Gas – International Fuel Oil parity
- Gas Prices under small /Isolated discovered Fields – Arm’s Length Pricing
- NELP Gas – Market Determined Pricing
- CBM Gas – Arm’s Length Pricing
With the New Domestic Natural Gas Pricing Guidelines, 2014 they all are brought under one pricing umbrella where an exemption was given to prices which have been fixed contractually for a fixed period of time, till the end of such period.
Prevailing Natural Gas Prices in India, 2015 – Perception Vs Reality
- New Domestic Natural Gas Prices :
The Natural gas price in India is revised every six month based on the weighted average rates prevailing in US & Mexico (Henry Hub), European Union & Former Soviet Union countries (National Balancing Point) , Canada (Alberta Gas) and Russia with a lag of one quarter.
- Perception –
This new market linked pricing system was introduced to bring transparency in domestic natural gas pricing and there by stimulating private partnership in the Indian gas sector to increase domestic production.
- Reality –
The gas prices used in the formula are taken from gas surplus countries which have well developed transportation infrastructure rather than linking it to gas deficient neighboring nations. This made the domestic natural gas price lower than the natural gas prices prevailing in similar geographies which in turn discourages private investments in Indian gas sector.The falling natural gas prices after the implementation of the formula have reduced the profitability of existing producing fields as well as questioned the viability of new exploration projects in India. These prices do not encourage new exploration projects to unearth India’s potential hydrocarbon resources lying in deep water areas which normally have a cost factor of $6-7/mmbtu.The premium which was announced for discoveries in ultra deep water, deep water , high pressure and high temperature areas are applicable to the discoveries made after 2014. This questions the viability of already discovered fields like ONGC’s KG-DWN- 98/2.
As per the industry projections, the new gas prices according to the above formula is expected to decrease further in the next year before it starts climbing back. This discourages capex in exploration and production of gas finds in the deep water areas of the country.
- Perception –
- Imported LNG Prices :
Import of LNG in India from international markets are usually through Long Term, Medium Term/Short Term and Spot contracts. These Contracts are based on the pricing fixed between buyers and sellers. These prices are not controlled by the government. Petronet LNG Ltd. is the largest LNG importer in India whose major imports are through long term contract signed with RasGas to buy 7.5 mmtpa of LNG for 25 years starting from 2004. The long term contract between Petronet and RasGas are linked to the previous 12-month Japan Crude Cocktail (JCC) including caps and floors based on the average JCC prices over the past 60 months.
- Perception –
This long term LNG contract is expected to ensure price stability and reduces volatility with respect to global market. Even if the global prices falls, this contract price wont reflect it in a hurry.
- Reality –
After a slump in crude oil prices below $50/barrel, the price of delivered spot LNG has tumbled to a range of $7-8/mmbtu which is almost half the rate at which Petronet imports LNG from RasGas ($12-13/mmbtu). This made Petronet the highest payer on LNG in the world. As a result of this high price, the customers of Petronet like GAIL,IOCL,BPCL are opting for spot cargo rather than off taking this long term LNG which forced Petronet to cut its supplies (around 32%) from RasGas. Petronet has take-or-pay contract with RasGas which makes them pay for the quantity it failed to lift. This account to about INR.94 Billion in addition to the INR.4 Billion per quarter as demurrage charges due to the idling of its three cryogenic ships which it had hired for ferrying LNG from Qatar. As Petronet is having similar take-or-pay contract with its off takers who also have similar agreements with its customers like Fertilizers and Power industry, the repercussions of this take take-or-pay obligation may spread to other sectors.Finding the fiasco associated with this long term LNG contract, many Indian companies are staying away from long term LNG contracts which makes spot contracts more preferable. With the ministerial level intervention and changing LNG market has made RasGas inclined to re-negotiate the contract under today’s conditions. RasGas has agreed to relieve Petronet from the penalty payment under the condition that Petronet will lift its full volume in the subsequent years.Similarly a new formula is under consideration to price the LNG under 3 month average of Brent Crude which will make the LNG prices move in line with the lower crude oil prices.But the global LNG prices are expected to fall down by 2020 with the increase in global LNG output due to US shale revolution, new supplies from regions like Australia and anticipated demand contraction from top consumers like Japan and Korea. This may expose Petronet again to similar fiasco in the future.
- Perception –
- Trans-national Pipeline Gas Prices :
With respect to the recent developments regarding TAPI, it is expected that Natural Gas from Turkmenistan, the country with the World’s 4th largest Natural Gas reserves is expected to reach India by 2018. The gas price formula accepted by ECC on 2012 contains a base price, agreed risk sharing formula and gas price review mechanism. The gas price formula is same for all buyers (Afghanistan, Pakistan and India) but the base price is different for all buyers.
- Perception –
The agreed formula is indexed to fuel oil basket and other indices which are not as volatile as crude oil. This will reduce price volatility with respect to global gas market.
- Reality –
Recently with the lifting of sanctions from Iran, the prospects of gas imports from the country is catching attention. India and Iran long time back were in talks for importing LNG as well as laying pipelines like IPI, SAGE from Iran which are under revival mode with the easing of sanctions. These gas imports from Iran finds cheaper than TAPI gas under the present situation of lower commodity prices.Similarly the prices in global LNG market, which is a substitute of pipeline gas is expected to have a bearish trend by 2020 due to the increasing LNG supplies as well as demand contraction. This questions the viability of such high risky pipeline projects in near term.
- Perception –
Way Forward :
India has come a long way from various pricing regimes to a single transparent pricing mechanism where the pricing of all the domestically produced natural gas are held under one umbrella. But India requires a proper market linked pricing to encourage unearthing the vast reserves found in difficult terrains through domestic as well as foreign participation. Similarly the gases from other sources like LNG as well as the trans national pipeline gas prices should be competitive such that they can create a win-win situation for both the suppliers as well as consumers during the global market ups and downs. The proper pricing of natural gas is very critical for India as multiple sectors are directly exposed to Natural Gas price changes which can affect the common man in various ways.