Demand for Cut in Gas Rates As Global LNG Prices Fall


Demand for Cut in Gas Rates As Global LNG Prices Fall

A collapse in global liquefied natural gas (LNG) prices is fuelling demand at home for reworking the government-set price ceiling for gas from difficult terrains to cut high domestic rates in line with global prices, a move that could cap gains for producers such as ONGC and Reliance Industries while boosting affordability for consumers.

The price ceiling for gas from difficult fields today stands at $9.32 per million metric British thermal unit (mmBtu) while the domestic formula price, which applies to most locally-produced gas, is $3.69 per mmBtu. By comparison, the spot rates of LNG delivered to Indian shores are in the range of $3.5-$4 per mmBtu.

Local rates, published every six months, factor in data for the trailing four quarters with one quarter lag. The next revision, due in October, will likely bring down ceiling but executives at key gas buying firms fear the fall could be small and delayed as the calculation is based on price data for a longer period. They want the government to shorten the period for calculation of ceiling to reflect the current global slump.

Producers are free to market their gas from difficult terrains such as deep sea and high pressure high temperature areas but prices can’t cross the ceiling prescribed by the government—an incentive, introduced three years ago, that prompted RIL-BP and ONGC to pledge billions of dollars of investments in their deep sea fields. But global prices have since collapsed.

Even if it is a ceiling, and not the floor price, it can set unrealistic price expectation among producers, executives at key gas buyers told ET. Such high reference points can result in unnecessary pressure on gas buyers to quote a higher price during auctions, executives said, adding that unrealistic price expectations among producers can delay sale as well as production of domestic gas.

GAIL, Indian Oil, Bharat Petroleum and GSPC are some of the major buyers of domestic and imported gas in India.

So far, ONGC is the only beneficiary of higher rates for gas from difficult terrains. And the two buyers of its gas, GAIL and GSPC, are paying about $8 per mmBtu currently for its gas, according to sources, much higher than the spot LNG rates. ONGC has more supplies lined up for next year while Reliance too plans to produce gas from its deep sea fields early next year, for which bids are likely to be invited later this year. Vedanta also enjoys pricing freedom for its gas even though its Barmer field is not a difficult field. It is currently engaged in pricing negotiations with GAIL.

Local producers often cite expensive long-term LNG deal with Qatar to seek a higher price. “Domestic producers want their gas to be benchmarked to Qatar deal and not spot rates, which is unfair. They must realise that the global gas market has totally changed and the LNG market is oversupplied and would remain so for years,” said an executive. Indian buyer pays Qatar $9 per mmBtu under the longterm deal that was renegotiated in 2015 and yet looks expensive today.

Price ceiling has risen 40% since April-September 2016, when it was introduced, while the domestic formula price is up 20%.

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