Govt hikes domestic natural gas prices by 62%, effective Friday

India has increased the domestic natural gas price by 62% from $1.79 per million British thermal units (mmBtu) to $2.9 per mmBtu under the domestic gas price regime, which was introduced in 2014. The new price effective from 1 October will result in an increase in electricity tariffs from gas fuelled power projects and push up the cost of fertiliser production. 

The bi-annual price revision exercise fixes up the price at which domestic natural gas is supplied by explorers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) and comes in the backdrop of Goldman Sachs upping its forecast for international benchmark crude oil Brent price to reach $90 per barrel by year end from the earlier estimate of $80 per barrel.

The new price will be applicable from 1 October till 31 March and was notified by the Director General of Petroleum Planning and Analysis Cell (PPAC) Praveen M. Khanooja. India imports 53% of gas demand.

Prices remained unchanged for the first six months of the current financial year. Also, the ceiling price for gas from difficult fields such as deep water, ultra-deep water and high pressure-high temperature areas for October-March was increased to $6.13 per mmBtu from the earlier price of $3.62 per mmBtu.

 “The domestic gas price has increased by 62% from $1.79/mmbtu (GCV basis) for the period H1 FY2022 to $2.9/mmbtu for the period H2 FY2022. The domestic gas price increase was driven by the significant run up in the prices of gas at global gas hubs. The increase in gas prices provides limited relief to Indian upstream producers as even at these prices, gas production remains a loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services/equipment costs,” said Sabyasachi Majumdar, senior vice president and group head - corporate sector ratings, ICRA in a statement. 

The price is on a gross calorific value (GCV) basis. Calorific value is heat value obtained from one volume unit of gas. While net calorific value (NCV) doesn’t take into account the latent heat of vaporization, GCV includes all the heat released by the fuel.

 “Gas prices have risen globally to multi year highs owing to supply side issues due to planned and unplanned shutdowns, low storage levels in Europe, US etc, lower wind and hydro power generation due to still weather and droughts respectively amid increasing demand due to economic recovery and multiple events of severe weather in several parts of the world especially Asia which accounts for three quarters of the world’s LNG consumption. Additionally, gas consumption has also risen due to switch from coal to gas in China,” the ICRA statement added.

In October 2014, the National Democratic Alliance government announced a new gas pricing formula using the weighted averages of prices in the three major international gas trading hubs of US Henry Hub, the UK National Balancing Point and Japan’s custom-cleared rate. Gas comprises about 6.2% of India’s primary energy mix, far behind the global average of 24%. The government plans to increase this share to 15% by 2030. India’s gas demand is expected to be driven by the fertilizer, power, city gas distribution, and steel sectors.

 “For the power sector, the notified increase in the domestic gas prices would lead to an increase in the variable cost of generation for the domestic gas-based power projects by about 40% compared to the cost of generation at the earlier price. Given the cost-plus nature of the PPAs tied-up by the gas-based power projects, the increase is expected to be passed on to the customers, mainly the state distribution utilities (discoms),” the ICRA statement said.

 “As per ICRA estimates, for every $1/mmbtu rise in the pooled price, the subsidy requirement for the urea sector rises by around Rs. 4500-5000 crore. With pooled prices at these levels and elevated international urea prices, the subsidy budget remains inadequate to meet the urea subsidy outgo in the current fiscal,” the ICRA statement added.

This comes in the backdrop of India’s domestic gas production on an upswing. According to the monthly production report released by ministry of petroleum and natural gas, there was an 20.23% increase in gas production in August. 

 “Natural gas production during August 2021 was 2923.94 MMSCM, which is 20.23% higher when compared with production of August 2020 but 10.14% lower than the monthly target. Cumulative natural gas production during April-August, 2021 was 13985.76 MMSCM, which is 19.94% higher than production during corresponding period of last year but 6.39% lower when compared with target for the period,” the report said.

India spent $62.71 billion on crude oil imports in 2020-21, $101.4 billion in 2019-20 and $111.9 billion in 2018-19.

 “Accordingly, Asian spot LNG prices have climbed to their highest ever levels of above $30/mmbtu and are more than double of long-term LNG prices. Besides spot LNG, term LNG prices also remain elevated owing to high crude oil prices,” the ICRA statement said.