India Gas Pricing Impact
Content
Domestic Gas Price revision in India – Impact Assessment DLXNE/July’1 Introduction
Indian Government has taken a decision to revise the domestic gas prices with effect from 01 st April 2014 based on the formula proposed by the Rangara an !ommittee report" #he !ommittee was set up in $ay 2012 to look into the various aspects of gas %roduction &haring !ontract '%&!() including gas pricing mechanism" #he landmark move has been appreciated by the investors and players across the upstream sector" It has given much needed shot in arm to the gasping gas sector which has seen the foreign investments in *+% sector dropping from ,&- . bn in 200/ to ,&- 1"2 bn in 2012" Gas pricin! " #o$ t#e mec#anism $or%ed in India 0arious pricing regimes e1ist in India) which has evolved over the time" 2or conventional gas well3head prices are between ,&-4"56."1 per mmbtu and for coal bed methane '!7$( gas it is ,&-5"16/". per mmbtu" #he current range of 89G prices is between ,&-1061. per mmbtu"
&an!ara'an (ommittee #he Government of India constituted Rangara an committee in $ay 2012 to look into the %roduction &haring !ontracts '%&!s( mechanism in petroleum industry which also includes approach to domestic gas pricing" After deliberations) the Rangara an !ommittee submitted its report to Government of India in -ecember 2012" In the suggested pricing mechanism) there are two broad elements which are used for an average which will be used as an :unbiased arm;s length price:" #hese are< 1" A price obtained by taking the cost of li=uefied natural gas '89G( imports into India under long3term contracts and removing charges such as transportation to obtain a theoretical price at the point of production in e1porting countries" #his is known as the netback price" #he government decided not to include spot import costs" It will be a weighted average" 2" #he weighted average of prices at three ma or gas trading points 3 the hub price at >enry >ub in the ,nited &tates) the price at the 9ational 7alancing %oint of the ,? and the netback price at sources of supply for @apan" India #as a!reed on a pricin! )ormula )or !as supply contracts $it# producers )rom April 1* +,1-* when the current benchmark deal with Reliance Industries e1pires" #he new formula will be valid for five years and applies only to new contracts or renewals when e1isting ones e1pire" It does not apply to contracts which contain a specific formula for natural gas price inde1ation or fi1ing" #he Rangara an committee said that after five years) :the possibility of pricing based on direct gas3to3gas competition may be assessed:" .#e prices $ill /e revie$ed every 0uarter) moving away from the monthly reviews suggested by the Rangara an committee to reduce volatility and make it easier for investment decisions" 2or both pricing elements) the formula will take the average prices for the four =uarters preceding the =uarter before the review" &o for the =uarter starting April 1) 2014) the formula will be based on the four =uarters ending -ec" 41) 2012"
Impact o) Proposed Gas Pricin! 1ec#anism on various sectors2 i" 3pstream sectors / E4P (ompanies2 #he gas price revision will undoubtedly be a big positive for the Indian *+% companies who had been re=uesting for the same due to increased cost of e1ploration and deep water drilling) plus higher operational costs" #his will lead to bigger investment in Indian gas *+% market including foreign investments in the sector) which will lead to higher domestic gas production in the long term"
ii5
Do$nstream sector a" Po$er2 #he news is negative for the power sector as a whole as there is no fuel cost pass through mechanism in the Indian contracts" >owever in longer term if the government allows the fuel cost pass through for the power sector the news may prove to be longer term positive" It remains to be seen how the government distinguishes the gas based power plants from coal based power plants) because as such the gas based power plants cannot compete against the coal based power plants under normal market conditions with the new gas price" b" 6ertili7ers2 &ince the fertiliAer producers gets subsidies from the government for the difference between cost of production to cost to sale) the news does not influence the sector much" #here can be a slight negative impact due to the base effect of how subsidies are calculated" c" &e)inery 4 Petroc#emicals and ot#ers2 #he news will be a basic negative for this sector) in reality through there is almost no domestic gas available for this sector after supply fertiliAer and power sectors on priority" #he sector is practically surviving on imported 89G hence in practice it does not matter much for the sector" Bn the flip side on long term if this leads to higher production of domestic gas which can be made available to these sectors it can be a positive for them since the domestic gas still remains cheaper than imported 89G"
Impact o) !as pricin! mec#anism on LNG demand in India2 i" (reation o) In)rastructure – Cood$ac has in its previous reports always stated that increase in domestic production in India will be long term positive for 89G demand) since more availability of domestic gas will lead to better gas pipeline infrastructure and the better connectivity will be a big plus in increasing long term 89G demand from the unconnected areas" Lo$erin! o) price !ap /et$een domestic !as and LNG – #he lowering of price gap between domestic gas and 89G will be a positive for the Indian 89G demand as a whole since it will lead to greater acceptance of higher price gas and thus imported 89G among the gas users" 2urther since the Indian government policies will be more inclined to promoting higher price domestic gas in various sectors 'which includes sect oral reforms for power ) citigas etc( the overall gasD89G consumption will ultimately increase in the long run" (End)
ii"
Indian Government has taken a decision to revise the domestic gas prices with effect from 01 st April 2014 based on the formula proposed by the Rangara an !ommittee report" #he !ommittee was set up in $ay 2012 to look into the various aspects of gas %roduction &haring !ontract '%&!() including gas pricing mechanism" #he landmark move has been appreciated by the investors and players across the upstream sector" It has given much needed shot in arm to the gasping gas sector which has seen the foreign investments in *+% sector dropping from ,&- . bn in 200/ to ,&- 1"2 bn in 2012" Gas pricin! " #o$ t#e mec#anism $or%ed in India 0arious pricing regimes e1ist in India) which has evolved over the time" 2or conventional gas well3head prices are between ,&-4"56."1 per mmbtu and for coal bed methane '!7$( gas it is ,&-5"16/". per mmbtu" #he current range of 89G prices is between ,&-1061. per mmbtu"
&an!ara'an (ommittee #he Government of India constituted Rangara an committee in $ay 2012 to look into the %roduction &haring !ontracts '%&!s( mechanism in petroleum industry which also includes approach to domestic gas pricing" After deliberations) the Rangara an !ommittee submitted its report to Government of India in -ecember 2012" In the suggested pricing mechanism) there are two broad elements which are used for an average which will be used as an :unbiased arm;s length price:" #hese are< 1" A price obtained by taking the cost of li=uefied natural gas '89G( imports into India under long3term contracts and removing charges such as transportation to obtain a theoretical price at the point of production in e1porting countries" #his is known as the netback price" #he government decided not to include spot import costs" It will be a weighted average" 2" #he weighted average of prices at three ma or gas trading points 3 the hub price at >enry >ub in the ,nited &tates) the price at the 9ational 7alancing %oint of the ,? and the netback price at sources of supply for @apan" India #as a!reed on a pricin! )ormula )or !as supply contracts $it# producers )rom April 1* +,1-* when the current benchmark deal with Reliance Industries e1pires" #he new formula will be valid for five years and applies only to new contracts or renewals when e1isting ones e1pire" It does not apply to contracts which contain a specific formula for natural gas price inde1ation or fi1ing" #he Rangara an committee said that after five years) :the possibility of pricing based on direct gas3to3gas competition may be assessed:" .#e prices $ill /e revie$ed every 0uarter) moving away from the monthly reviews suggested by the Rangara an committee to reduce volatility and make it easier for investment decisions" 2or both pricing elements) the formula will take the average prices for the four =uarters preceding the =uarter before the review" &o for the =uarter starting April 1) 2014) the formula will be based on the four =uarters ending -ec" 41) 2012"
Impact o) Proposed Gas Pricin! 1ec#anism on various sectors2 i" 3pstream sectors / E4P (ompanies2 #he gas price revision will undoubtedly be a big positive for the Indian *+% companies who had been re=uesting for the same due to increased cost of e1ploration and deep water drilling) plus higher operational costs" #his will lead to bigger investment in Indian gas *+% market including foreign investments in the sector) which will lead to higher domestic gas production in the long term"
ii5
Do$nstream sector a" Po$er2 #he news is negative for the power sector as a whole as there is no fuel cost pass through mechanism in the Indian contracts" >owever in longer term if the government allows the fuel cost pass through for the power sector the news may prove to be longer term positive" It remains to be seen how the government distinguishes the gas based power plants from coal based power plants) because as such the gas based power plants cannot compete against the coal based power plants under normal market conditions with the new gas price" b" 6ertili7ers2 &ince the fertiliAer producers gets subsidies from the government for the difference between cost of production to cost to sale) the news does not influence the sector much" #here can be a slight negative impact due to the base effect of how subsidies are calculated" c" &e)inery 4 Petroc#emicals and ot#ers2 #he news will be a basic negative for this sector) in reality through there is almost no domestic gas available for this sector after supply fertiliAer and power sectors on priority" #he sector is practically surviving on imported 89G hence in practice it does not matter much for the sector" Bn the flip side on long term if this leads to higher production of domestic gas which can be made available to these sectors it can be a positive for them since the domestic gas still remains cheaper than imported 89G"
Impact o) !as pricin! mec#anism on LNG demand in India2 i" (reation o) In)rastructure – Cood$ac has in its previous reports always stated that increase in domestic production in India will be long term positive for 89G demand) since more availability of domestic gas will lead to better gas pipeline infrastructure and the better connectivity will be a big plus in increasing long term 89G demand from the unconnected areas" Lo$erin! o) price !ap /et$een domestic !as and LNG – #he lowering of price gap between domestic gas and 89G will be a positive for the Indian 89G demand as a whole since it will lead to greater acceptance of higher price gas and thus imported 89G among the gas users" 2urther since the Indian government policies will be more inclined to promoting higher price domestic gas in various sectors 'which includes sect oral reforms for power ) citigas etc( the overall gasD89G consumption will ultimately increase in the long run" (End)
ii"
