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India Panel Wants to Double Natural Gas Price

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India needs more gas to run its gas-fired power plants, most of which are either operating at a very low capacity.

India’s natural gas prices could nearly double in one go if a state-set panel’s recommendations are accepted by the federal government, but some producers feel that still won’t be enough to encourage exploration of harder-to-find gas in the deep sea.

India desperately needs more gas to run its gas-fired power plants, most of which are either operating at a very low capacity or unable to start production at all due to a lack of fuel. A crippling shortage of electricity has affected the country’s ability to expand industrial and agricultural production.

The government says that 8,200 megawatts of power production could be quickly added to India’s total generation of 210,000 megawatts if gas supply is assured to these plants.

India’s federal government usually enters into production sharing contracts with gas producers, specifying the price at which gas can be sold to consumers, such as power, fertilizer, cement and steel companies, as well the proportion of gas that can be sold to various sectors. The average price of gas in India is around $4 per million metric British thermal unit.

The panel has recommended scrapping government-set pricing. It says India should instead use an average of international export and global benchmark prices to arrive at the price of gas, which would be dynamic and revised on a monthly basis.

Neelabh Sharma, oil and gas analyst with BOB Capital Markets, said the new formula, if applied at current global price levels, would yield an average gas price of around $8/mmbtu.

A senior oil industry executive, who didn’t wish to be named, said the panel’s recommendations still left the question of which agency would be responsible for the large amount of data crunching required to arrive at the average natural gas price.

“Neither price nor quantity of gas is easily available. How will [the] government find the data? Many buyers have long-term contract prices, how does one find that?” The person said that the average of international prices isn’t the same thing as market price, which is determined by domestic demand and supply.

He added that as gas has to be explored in progressively deeper waters, exploration and production costs are rising. “International investors will come into India’s oil and gas sector only when policy incentivizes oil and gas exploration. Eventually, the government would have to give freedom to operators to set a market price for oil or gas that they produce.”

Reliance Industries, which operates the country’s largest gas find off India’s east coast, also isn’t happy about the panel’s recommendations, according to a report in Mint on Thursday.

“Even if gas prices are decided in line with the recommendations of the committee, it wouldn’t really be a market-determined price. The demand-supply situation for natural gas in India is totally different,” the financial daily quoted an unnamed Reliance executive as saying. ((LINK to Mint story:

Mr. Sharma of BOB Capital Markets said Reliance would be happier with a price of around $12/mmbtu, which is closer to the price at which Indian companies import natural gas to make up for the shortage of domestic production.

Indian oil ministry officials couldn’t be reached for comment.

Follow India Real Time on Twitter @indiarealtime.

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