On June 27, the Government of India
announced a decision by the Cabinet Committee on Economic Affairs (CCEA) to
approve pricing of domestic natural gas at an overage cost of imported
liquefied natural gas (LNG) into India and international gas hub rates. The new formula comes into effect on
April 1, 2014, at which time the price is expected to be about US$8.40 per
million British thermal units (MMBtu) or double the current price.
The new pricing formula for each quarter
will be calculated based on the 12-month trailing average price, with a lag of
one month. This means that the
price for April through June 2014 will be calculated on the 12-month averages
ending Dec. 31, 2013. The newly
approved gas pricing formula will be in effect for five years.
The impact of the natural gas price rise
in India will differ greatly from a gas price hike China announced at about the
same time:
1.
Although both countries came to a similar price, in China the new price
represents a 15 percent raise vs. a doubling in India.
2.
China’s gas price change was effective July 10, while India’s will not
bite until April 1, 2014.
3.
While China consumes two and one-half times more gas than India (146
billion cubic metres vs. 55 bcm in 2012—BP), gas represents a larger share of
total primary energy requirements in India (8.5%) than in China (4.8%)(BP:2012).
4.
Sectoral use of natural gas varies widely, with China using nearly 30
percent of its gas in residences and India nearly none. In contrast, China’s non-energy use of
gas (primarily refining and petrochemical production, especially fertilizers)
amounted to 17 percent compared to 59 percent in India, where gas for
fertilizer production is steeply subsidized (IEA:2009). Finally, gas use in the electric power
sector is minimal in China, while gas represents some 10 percent of India’s
installed power capacity.
Although the decision to raise Indian
wholesale gas prices was taken by the CCEA and not just the Ministry of
Petroleum and Natural Gas (MPNG), other ministers lost no time in
objecting. The Ministry of Finance
noted that Reliance Industries, Ltd. (RIL), led by Mukesh Ambani, had produced
from its KG-D6 offshore gas field well below target and should have to sell
targeted production, as well as the cumulative shortfall, at the old
$4.20/MMBtu price. MPNG head M.
Veerappa Moily rejected the Finance Ministry critique, noting “There is no
confusion; there is no vagueness.
And I don’t think there is scope for any interpretation whatsoever.” India’s Planning Commission had been
pushing for such a gas price boost for two and one-half years.
The Indian Power Ministry already called a
meeting with the states and other stakeholders to seek suggestions on easing
the impact of the proposed gas price jump. The Power Ministry also has questioned setting the price in
U.S. dollar terms, as that adds volatility given the depreciation of the Indian
rupee (Rs). Finance Minister P. Chidambaram
has reassured the power and fertilizer sectors, which receive state-set
allocations of natural gas at subsidized prices, that their concerns would be
addressed before the price increase takes effect next year.
The power industry has borne the brunt of
the production collapse at RIL’s Krishna-Godavari fields from nearly 70 million
cubic metres of gas per day (2.4 billion cubic feet per day) in 2010 to some 14
mmcm/d recently. RIL had committed
29.7 mmcm/d of KG-D6 gas production to 25 power plants, but in Nov. 2011, their
allocation was reduced and in March 2013 cut off completely. A July 18 meeting of the Empowered
Group of Ministers, led by Defence Minister A.K. Antony, rejected an Oil &
Gas Ministry proposal to abolish the priority ranking and instead confirmed the
priority for the fertilizer industry, then liquefied petroleum gas production,
power, and city gas. Practically,
this means that unless RIL can turn around KG-D6 production, only the
fertilizer industry will be supplied with Krishna-Godavari gas.
Currently only one-third of the 72 mmcm/d
needed for the 18.7 gigawatts (GW) of gas-based power plants throughout India
is being met; a further 8 GW of capacity is nearing commissioning without firm gas
supplies. Oil Minister Moily has
urged the EGoM to explore other gas supply options for the power sector,
including using uncontracted volumes produced by state-owned Oil and Natural
Gas Corp.
An analysis by Bank of America Merrill
Lynch, reported a week after the CCEA gas price decision, suggested that the
Government of India will collect some Rs 13,000 crore (US$ 2.2 billion) in
higher taxes, royalties and dividends, particularly from state-owned gas producers
ONGC and Oil India Ltd. (OIL).
Privately-owned RIL would pay about 10 percent of the increased central
government revenues. The analysis
opined that much of the additional government revenue from the higher gas price
would be funneled into subsidies to protect sectors such as fertilizer and
power.
If the government keeps the cost of
natural gas to the fertilizer industry unchanged, CRISIL (Credit Rating
Information Services of India Limited)
estimates that,
even after receiving the higher tax and royalty payments, the central
government will lose an additional net Rs 2000-2500 crore (US$335-420 million)
for subsidies just for the fertilizer sector. During 2009-2011, Indian government subsidies for natural
gas have varied from $2-3 billion.
This pales in comparison to oil subsidies, which leaped from $11.5
billion in 2009 to $30.9 billion in 2011 (IEA).
The higher
natural gas prices should improve the incentive for exploration and development
of domestic natural gas in India by domestic private and public companies, as
well as foreign firms. Repeated
delays in formulating government policy on shale gas development have kept
India from conducting its first shale gas tract leases, unlike China, which
conducted its first shale gas bid round in June 2011 and its second in 2012
with 19 blocks awarded in January 2013.
This may not impact India dramatically as it has relatively modest shale
gas resources of 2,718 bcm (96 tcf), compared with China, the global leader with 31,573 bcm
(1115 tcf USEIA:2013).
The government
decision to double natural gas prices represents nothing more than a belated
nod to reality. India increasingly
must turn to imported LNG to meet growing, and still not fully satisfied,
demand for natural gas. Indian
domestic gas production rose from 27 bcm in 2002 to 51 bcm in 2010, only to
fall back to 40 bcm last year. It
commenced imports of LNG in 2004 and reached 20.5 bcm in 2012 (BP), making it
the world’s fifth largest LNG importer.
Average prices of imported LNG run some $11-12/MMBtu or three times the
current regulated natural gas price in India.
The disconnect
can be seen in the failure of Petronet LNG’s new terminal in Kochi to sign up
customers. The Rs 4200 crore
(US$700 million) terminal, due to start operation next month, will initially
operate at less than 10 percent of its 5 million tons (6.75 bcm) per year
capacity. Gas Authority of India,
Ltd. is seeking renegotiation of its 1.5 MMTY deal for LNG from Australia’s
Gorgon project, scheduled to start delivery to Kochi in 2015, as the cost delivered
to GAIL customers could approach $17/MMBtu under the current contract.
On the demand
side, the continuing subsidies for natural gas use in the power and fertilizer
sectors will increase the already significant burden on the central government
budget deficit. Union and state
governments in India share a constant concern over feeding the population and
an attitude that power—when and where it’s available—should be a “free good,”
especially in the agricultural sector.
With these political pressures, it will be difficult to restrain, less
alone reduce, gas price subsidies and government volume allocations. Ironically, this will only expand
the gap between notional demand for gas in India and available supply; continue
curtailed and unreliable electric power; and maintain coal as the dominant and
most polluting fuel. The timing of
elections for the Union Parliament—May 2014, the month after the natural gas
price rises—makes these issues even touchier.
India has taken
an important step to bring its domestic producer prices of natural gas closer
to world levels. The next
important step, admittedly a much more difficult one, is to increase the
natural gas price for domestic consumers.
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