Pricing of Natural Gas in India
Pricing of Natural Gas in India
Pricing of Natural Gas in India
List of Tables
Table 1: Natural Gas Consumption in India Table 2: Natural Gas Demand Projection Table 3: Summary of Prices prevailing in India Table 4: Gas Price Differentiation in Indian Market (2010) 3 4 9 10
List of Figures
Figure 1: Pool Price at Various LNG Prices for 5 MMTPA New Supply Figure 2: Pooling Options in India 13 14
Consumption View
Natural gas has emerged as the most preferred fuel due to its inherent environmentally benign nature, greater efficiency and cost effectiveness. According to the Ministry of Petroleum and Natural Gas, gas use in India amounted to 59 billion cubic meters in FY 2009/10, up from 43 billion cubic meters in FY 2008/09; energy use amounted to 61% compared to 39% used for non-energy purposes (see Table 1). Before the start of Krishna-Godavari in April 2009, consumption was supply constrained and demand for gas could easily have been 30 billion cubic meters higher. Indeed, it is important to make a clear distinction between potential demand and actual consumption as these numbers widely differ. In 2007, unmet demand was estimated at 35 billion cubic meters. Table 1: Natural Gas Consumption in India
(Source: GAIL, MoPNG) MoPNG also allowed ONGC and OIL to market gas produced by them at market rates. ONGC was given permission to sell gas from its C-series fields in Mumbai offshore at USD 5.25/MBtu, even higher than KG-D6. These fields are expected to produce 1 BCM/y. On top of gas produced domestically, LNG has become an increasing part of the supply mix of India. The current LNG prices for the two operating terminals are the following: Long-term contract with Qatars RasGas (Dahej) For the first five years, Petronet paid a fixed-price agreed in the contract (USD 2.53/MBtu for 5 mtpa). In January 2009, this price was raised to USD 3.12/MBtu while volumes increased to 7.5 mtpa in Q4 2009. Short-term contracts Petronet negotiated with RasGas until December 2008 for 1.5 mtpa, Petronet paid USD 8.50/MBtu, but the price for end-consumers was pooled with the USD 2.53/MBtu Petronet paid for LNG under the long-term contract.
(Source: IEA, Indian Oil and Gas, Industry announcement and presentations)
Pricing Issues
The pricing issue in India has always been quite complex. Firstly, APM gas supplies have been declining while non-APM gas saw a dramatic increase in volume and share. Furthermore, APM gas has been allocated in priority to power producers and fertilisers, two sectors expected to see their demand increasing over the coming decade. While the Ministry of Petroleum and Natural Gas has been pushing for higher prices to limit losses from the PSU, this has met with strong resistance from the Ministry of Power and Ministry of Chemicals and Fertilisers. The subsidies to fertilisers have already multiplied by five over the last five years to reach INR 75 849 crore (USD 16.6 billion) in 2008/09.
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Road Ahead
There have been many attempts undertaken by Indian governments to liberalise/revise the dual system until the decision was taken in May 2010. Several suggestions had been made: one was to increase the price paid to ONGC and OIL to USD 2.3/MBtu in 2010, to link it to a
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Sectoral Pool Sectoral pool is specifically for pre-identified sectors. As regards this study, this has been considered for Power and Fertilizer segments, although variants could extend to other sectors as well. Two basic forms of sectoral pools have been considered. (i) Combined pool - In combined pooling arrangement there is a single pool for Power and Fertilizer. The gas at pooled price is supplied to customers from both the sectors through an identified mechanism.
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The above options have been discussed in the subsequent sections. It needs to be noted that in all options presented herein, the existing cost structures of the gas supply from producers (or importers) remain unchanged, and the revenues to be generated would correspond to these costs, plus the transportation costs, taxes and duties as at present. Hence there is no impact on subsidies as a whole, although the cost of gas to individual consumer costs would be rationalised as a result of the pooling arrangements. In subsequent years, with expansion of supplies in the pool, this would be altered based on the cost and quantum of additional gas supplies. Hence, irrespective of the option selected, specific pool rules would need to be agreed on the cost and quantity limits and implemented by the pool operator accordingly.
Conclusion
In 2010, the Indian gas market is nevertheless at a crossroads. Despite the dramatic increase of domestic production, substantial issues remain which will have to be solved for the Indian gas market to reach its potential. Two major issues have been analysed within this Working Paper: Regulation/Policy and Pricing. The issues regarding policy are probably the most important: India needs a clear policy and regulatory framework in order to attract the investments needed in the energy sector, not only to sustain a high economic growth, but also to deal with poverty which leaves millions of people without access to energy. The role and powers of the regulators have to be clearly defined. India has opened up to private and foreign companies and these want regulatory stability with minimum intervention from the state. The government has reduced the gap between very cheap APM gas and more expensive other supplies. The dual system had indeed proven its shortcomings, which were increasingly visible as APM gas volume and share in total supplies diminished. Keeping low energy prices was not only a disincentive for upstream investment, resulting in losses for PSUs, but also discouraged investments in energy efficiency on the demand side. In the long term, additional LNG supplies are likely to be needed, but would also be more expensive than the current price paid for Qatari LNG. If India wants to attract additional LNG in the long term, it will have to increasingly compete in global gas markets at prices potentially higher than the current ones; otherwise LNG supplies will be taken by other Asian markets such as China. Pricing is also a key factor for the demand side due to some sectors sensitivity to gas prices: gas-fired plants must compete with coal-fired plants which are usually more competitive. However, in some cases gas-fired plants near production sources or import terminals could be more competitive than coal-fired plants, especially those using imported coal or domestic coal shipped over long distances. Gas use for fertiliser production depends on government policy towards dependency on other
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Reports
Report on Common Pool Pricing by Mercados Energy Market International and GAIL Natural Gas in India by IEA
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