Indian Gas Sector A Paradigm Shift in Pricing Dynamics

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Indian Gas Sector A Paradigm Shift in Pricing
Dynamics
One-Stop Shop for Business Information
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Summary
The cabinet committee for economic affairs (CCEA)
has approved the Rangarajan Committees proposal
to raise the price of natural gas from April 1,
2014. The price of gas is expected to be raised
to around 8.4/MMBTU and then revised every
quarter thereafter as per the Rangarajan formula.
The price of gas is determined by averaging the
netback wellhead prices of Indian imports and the
gas prices prevailing at global trading hubs of
US, UK and Japan. While upstream oil and gas
companies have been demanding a gas price
increase for a few years now, the fertilizer and
power sectors have voiced serious concerns over
any increase in gas price.
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The upstream companies felt that a low price of
gas did not adequately compensate them for the
substantial risks involved in exploration
activities. Further, the EP companies argued
that offshore exploration and production is
significantly costlier than onshore exploration
and the low price of gas makes deepwater and
ultra-deep water exploration and production
unviable. On the other hand, the power and
fertilizer sectors are extremely price sensitive
and any increase in the price of gas has a big
impact on their profit margins. Both these
sectors have zero pricing power as the prices of
fertilizers and energy are heavily regulated by
the government. The production of gas from RILs
KG-D6 block was expected to transform the gas
market in India.
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The gas consumers embarked on an expansion spree
encouraged by the prospects of cheap and abundant
gas. Although the gas field showed great promise
in the initial years of production, production
has been on the decline over the last two years
and production has decreased to just 14 MMSCMD
compared to estimated production of 80 MMSCMD.
The gas utilization policy of the government that
assigns priority to various sectors for
allocation of domestically produced gas resulted
in a skewed distribution of gas supply when
domestic production declined, benefiting the
fertilizer sector at the expense of the power
sector. While the supply of gas to the fertilizer
sector was not affected due to the decline in
domestic production, owing to higher priority,
the supply to the power sector reduced
substantially leading to an overall drop in gas
power plants PLFs across the country.
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As a result, the power industry in India is
facing an extremely tough business environment.
The sourcing of fuel, both coal and gas, has
become extremely difficult. The power companies
are burdened by excessive debts and banks have
become weary of lending to the sector. The
decline in domestic production of gas has
increased the countrys dependence on imported
LNG. The share of LNG in total gas consumption
has reached around 30 and has been increasing
over the years. There was a huge disparity in
prices of domestic gas and LNG. While domestic
gas cost consumers around 4.2-5.5/MMBTU, LNG
prices were in the range 13-18/MMBTU.
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Private gas producers have argued that gas should
be sold at a competitively determined arms
length price in line with provisions of the
production sharing contracts. However, given the
large supply-demand mismatch and dependence on
imported LNG, competitive bidding for gas results
in a price of gas which is almost at parity with
imported LNG. GSPC and RIL conducted competitive
bidding to sell gas from their Deen Dayal West
(DDW) field and Madhya Pradesh CBM block
respectively. The bidding resulted in gas prices
as high as 12-14/MMBTU. There was however a
difference of opinion between the petroleum
ministry and the producers over the manner in
which the bidding for gas took place. The
ministry was of the view that the bidding should
have been confined to only power and fertilizer
companies, those who were in the priority
allocation list.
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Table of Contents

1. Executive Summary
2. Industry Overview
3. The Current Pricing Paradigm The Rangarajan
   Formula
4. Impact Analysis of Increase in Gas Price for
   Fertilizer and Power Sector
5. LNG Imports
6. Rangarajan Committees Price Formula Views of
   different stakeholders
7. Demand Side Dynamics of Gas
8. Dynamics of Gas Supply
9. Demand Supply Gap An Analysis
10. KG-D6 Production Paralysis and its implications

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