Govt gas price rise to boost LNG, spur fuel reform

Govt gas price rise to boost LNG, spur fuel reform

New Delhi: India’s move to more than double the price of natural gas pumped by state firms will drive investment in gas output and spur LNG imports, raising the share of gas in the energy mix of Asia’s third-largest oil consumer.

The unexpectedly sharp rise of 113% in the price of gas sold by state-run Oil and Natural Gas Corp may stoke inflation, but also raises hopes for fuel price reforms, narrows gas market distortions and boosts ONGC profits.

The extra Rs30 billion ($638.7 million) a year ONGC says it could earn, about the same as its profit in the December quarter, would give it more muscle to compete with Chinese firms in its hunt for foreign energy assets.

“The move towards $4.20 in one sweep has shocked everyone and indicates the government’s resolve to push towards solid reforms in the sector," said Praveen Kumar, head of the South Asia oil and gas team at FACTS Global Energy, based in Singapore.

The step follows a court ruling in a gas pricing dispute between the country’s billionaire Ambani brothers that had been seen as affirming the government’s right to set the price of gas.

New Delhi lifted ONGC’s price to $4.20 per million British Thermal Units (mmBTU), the same as the rate for Reliance Industries Ltd’s gas from its KG-D6 field.

Boost for LNG

With LNG spot prices last week at about $4.50 per mmBTU in the Atlantic basin and $5.5-$6 in Asia, demand for spot cargoes is expected to rise as India’s capacity to handle LNG increases to 20 million tonnes a year in 2011-12 from 13 million tones now.

The new price for ONGC’s gas makes LNG attractive, although India needs more pipelines to handle additional flow, said P. Dasgupta, chief executive of Petronet LNG, India’s biggest importer of the supercooled gas.

“Higher gas prices would bring many more customers. Buying LNG would become viable for many more customers," he said.

Higher prices would also encourage investment in gas production at some fields of ONGC that were unviable when gas prices were low, and the firm would also invest in boosting output from producing fields, officials say.

Higher output and LNG imports would dent demand for liquid fuel in India as factories, power plants and automobiles switch to the cleaner fuel when supplies increase.

Analysts say the share of gas in India’s coal-dominated energy mix is expected to double to 18% by 2015 and to 20% in another five years.

Fast-growing India imports 70% of its energy and is looking both to secure assets abroad and attract investment to develop its oil and gas fields at home.

The sudden increase in gas prices will add to inflationary pressure by pushing up power tariffs and transportation costs. Compressed natural gas (CNG), which is cheaper than liquid fuels, is widely used in buses and taxis in Mumbai and Delhi.

Good sign for fuel reform?

On 7 June, a group of ministers will consider a government panel’s proposal to ease controls on petrol and diesel prices and raise the state-set prices of cooking gas and kerosene.

Global crude prices at about $70 a barrel roughly correspond to current state-set prices of petrol and diesel, making a move to market pricing timely as fuel prices would not suddenly jump.

However, radical change is unlikely as while it would ease a deficit-strapped government’s subsidy burden, it would be unpopular with the ruling Congress party’s core electorate of rural and lower-income voters.

The government is already under pressure from protesters and opposition parties as annual inflation has risen to nearly 10%, while food prices rose more than 16 percent a year in May.

Similar proposals in the past have gone nowhere.

“The government has definitely got reform on its agenda. Although not radical reforms, I’m seeing that in small steps they are doing what needs to be done," said Mayank Khemka, head of equities at ASK Investment Managers in Mumbai.

“The increase in gas prices is a precursor to de-regulation, or at least semi-regulation in fuel prices," Khemka said.