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India’s natural gas production is set to rise by over 42 per cent to 125 million standard cubic meter per day (mmscmd) over the next decade through 2027 owing to a market-linked pricing formula and the marketing freedom allowed by the government to companies, according to research and ratings agency ICRA.
“The pricing formula along with the marketing freedom could improve the viability of gas discoveries in challenging fields and could lead to higher domestic gas production over the longer term. ICRA expects domestic natural gas production to increase to around 110 mmscmd by 2020-21 and to 125 mmscmd by 2026-27 from the current level of around 88 mmscmd,” ICRA said in a statement.
It added that apart from marketing and pricing freedom for gas discoveries (not yet commenced production), the centre has also announced various reforms like implementation of the revenue-sharing model, a uniform licence framework and an open acreage policy under the new Hydrocarbon Exploration Licensing Policy (HELP) and reduction in royalty rates for the deepwater and ultra-deepwater areas which could aid in incremental gas production over the long term.
The recent fall in prices had made future development of many gas fields unviable. But the government provided marketing and pricing freedom (subject to a price ceiling) to players operating in deepwater, ultra-deepwater and high pressure-high temperature areas that were yet to commence commercial production as on January 1, 2016. Natural gas price ceiling for the challenging areas are US$5.3 per mmbtu as of now but this may keep varying in line with the prices of substitute fuel.
According to ICRA, the capacity utilisation levels of some gas transmission pipelines would remain sub-optimal in the near to medium term due to shortage of gas supplies but would show an increasing trend with rising LNG consumption. “Further, with incentives being offered for challenging fields, domestic gas production is expected to improve over the long term, which along with the rise in re-gasification capacity, could lead to an increase in pipeline utilization,” it said.
India’s total natural gas supply potential is expected to increase over the next five to six years with higher domestic production and commissioning of firm re-gasification capacity during 2018-22. With the increase in supplies, the difference between the projected demand and supply potential is expected to narrow down 2019-20 onwards. However, the upcoming LNG capacities may operate at relatively lower utilisation than the current utilisation of regasification capacities in the country, according to ICRA.
The price sensitivity of R-LNG demand would be critical in this regard. Analysts believe if many re-gasification terminals, as planned, come on stream over the next four to five years, the new entrants would face significant pressure on volumes and margins as they will have to compete with the existing terminals and brownfield expansion, which are more cost efficient because of lower capital intensity. Sub-optimal capacity utilisation and lower regasification margins could put significant pressure on the returns and credit profiles of new entrants, especially in the initial years of operations.
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