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NOV 28 2017

Natural gas pricing: Why Narendra Modi government must rethink rates

  • Economic Times, ET Bureau / Hyderabad
  • Created: Tue 28th NOV 2017

 

On the face of things, with the government notifying norms for pricing of domestic natural gas, based on traded prices in well-known exchanges like Henry Hub in the US, India has pretty much allowed market-pricing—while always promised in the production contracts the government signed with producers, this was not allowed till 2014; in 2016, a different formula was announced for gas produced in difficult areas like the deep seas.

While the current price for the first type of fields is around $2.89 per mmBtu, the price for gas from difficult gas fields is around $6.3 per mmBtu. To that extent, when the public sector ONGC says it cannot produce gas from even shallow water fields at the current $2.89 price, the government should just reject this outright. This, however, will be a short-sighted view, for several reasons.

For one, prices at exchanges like Henry Hub are reflective of the fact that the fields in these areas are highly explored and, to that extent, the area’s prospectivity is pretty much known—in India, by contrast, prospectivity is still to be established and, to that extent, higher prices are probably justified. Two, while the Henry Hub prices are known, you have to add the costs of transporting this gas to US ports from where it can be exported, it then needs to be liquefied for transportation, there is then the cost of transportation from the US to India, to which the costs of regasification need to be added.

In short, the landed price of gas on a apples-to-apples comparison is probably in the $6-7 per mmBtu range anyway. The price of gas India imports from Qatar is even higher at around $8-9 per mmBtu, based on current crude oil prices. While the government is free to say it will not give the higher price to local suppliers like ONGC and RIL-BP, the corollary is that suppliers like ONGC be allowed to decide if they want to produce. And if ONGC decides not to produce—as it is saying now, according to a PTI story—the government will end up importing the gas. And that gas will be imported at a price of anywhere between $6-9 per mmBtu. So, if the government is importing the gas at that price, surely it makes sense to give that kind of price to local suppliers—at the very least, India will save on precious foreign exchange.

An argument is made that if prices of natural gas go up, this will cause prices of fertilisers to rise as well; and if these are sold a fixed price to farmers, the government’s subsidy burden will rise as well. Apart from the fact that the need to keep farmer prices low cannot be the reason to not allow market-pricing for natural gas, the point is that if there is no production of gas, the government will have to import it at higher prices anyway—and if gas prices are not raised, there will be limited exploration for more natural gas.

Indeed, when the government signed contracts with companies for exploration/production of natural gas, it promised them both pricing and marketing freedom. While the 2014 and 2016 circulars ensured pricing freedom, marketing freedom implies giving local suppliers import-parity pricing—after all, if they had marketing freedom, they would be able to sell their gas to buyers at those prices.

Tags

Gas Natural Gas Oil ONGC Reliance Industries limited United States Import Crude Oil India ongc RIL

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