Home / Industry / Energy /  High gas prices: How India's gas economy works
Back

Earlier this month, the government raised domestic gas prices to a historic high, on the back of a seven-fold increase in international prices of liquefied natural gas (LNG) over the past two years. The higher prices are expected to hold for at least the next six months, and possibly more if the Russia-Ukraine war intensifies. This would add to the financial outgo for industrial consumers, households and the central government.

The price of gas from older and more established gas fields, where production is dominated by public sector oil companies, was raised to $8.57 per mmBtu (million metric British thermal units)—nearly thrice of what it was a year ago. The ceiling price of gas from more difficult deepwater fields, such as Reliance’s KG-D6 Basin, was raised to $12.46 per mmBtu, doubling over a year.

The government regulates prices of gas and reset them every six months. This is based on global prices, which shot up in mid-2021 as global demand picked up after lockdowns, and again in early 2022 after the Ukraine war led to disruptions of gas supplies to Europe. The International Monetary Fund’s gas price index has risen 72% in 2022, causing the average price of India’s LNG imports to rise sharply as well. Global gas prices are now critically dependent on how quickly European demand for natural gas for its heating and other requirements are satisfied. Prices of futures gas contracts show prices staying high till February 2023, before cooling off. But if the war worsens, higher prices could persist.

You might also like

Invesco to sell 5.5% Zee stake for $169.5mn 

Why DMart disappoints investors 

Shree Cement's good show fails to impress street

The gas economy

Total domestic LNG production this August was 2,896 million standard cubic metres (mmscm), 1% less than in August 2021, according to government data. Given the spike in global prices, imports have been hit more. India imported 2,369 mmscm in August, a year-on-year fall of 19%. India imports 45-50% of its LNG requirement every month, and thus relies on it majorly to fill its demand-supply gap. However, Europe’s thirst for gas, following the disruption of Russian supplies, means customers from that region are now outbidding customers from other parts of the globe.

The leading end-consumers of natural gas in India are the fertilizer industry (32% of consumption in April-August 2022) and city-gas projects (21%) that supply fuel to households for cooking and as a clean fuel for vehicles. They are followed by the power sector (14%), and the refinery and petrochemicals sector (11%).

Subsidy surge

Natural gas is a critical feedstock for the fertilizer industry and is used to produce ammonia. While other fossil fuels like coal and oil can also be used, they are more expensive to process. In India, a third of natural gas production is used by the fertilizer industry. Due to a rise in the price of most major inputs for the fertilizer industry, including natural gas, the cost of production of fertilizers in the country has soared.

As a result, the fertilizer subsidy, borne by the central government, has also jumped sharply. Between April and August this year, the total fertilizer subsidy amounted to about 1.21 trillion, an increase of 32% over the same period last year. Costs have risen so sharply that the government is reportedly considering imposing a windfall tax on natural gas producers, who are reaping a windfall due to global disruptions in gas supply.

Household stress

Households, which use gas for cooking and in vehicles, are also facing higher prices. Piped gas is also increasingly being used in industrial and commercial establishments in various cities. The number of domestic PNG connections for households has risen by 14% this year so far to about 9.7 million connections. The number of CNG stations in India has risen by 28.5% to 4,664 in this period.

For such consumers, the price of natural gas has soared. Piped gas prices have risen by 40-42% for consumers in Delhi and by 21-23% for consumers in Mumbai. This is in a scenario when the rise in domestic gas prices has trailed the rise in global gas prices. If global prices stay high, and the government reduces the differential, domestic prices could rise further. How all this plays out will depend primarily on the Russia-Ukraine war.

www.howindialives.com is a database and search engine for public data.

Elsewhere in Mint

In Opinion, Siddharth Pai explains how America’s vanishing demographic dividend will benefit Indians. How can India get more of its working-age people into employment? Amit Kapoor & Bibek Debroy answer. Tulsi Jayakumar writes on the misplaced paranoia over rupee volatility. Long Story narrates the many troubles with Kerala's plan for a shorter route to Bengaluru.

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout
x