Global natural gas prices drop, but policy blocking India from making gain
One of the first things the new government should do now is revisit the five-year-old formula determining the price of domestic natural gas
What would you call the antonym for an oil shock? India is all too familiar with supply disruptions and this may explain why it is taking time to figure out how to deal with a surfeit of advantages in the energy sector. In 2019, despite oil and especially natural gas prices moving more south than north, India has yet to take any key action to build on this advantage.
It is not often that India has surfed on such benign waves in the energy seas. In the domestic economy, there is a government just back in power with a stronger mandate; globally, demand for oil and gas is sputtering as the US-China trade war intensifies; and the emergence of more supplies from more nations have kept the lid on price rise for both fuels, especially natural gas. The odds against oil prices rising steeply in 2020 have been tackled in “How much can oil prices impact India’s import bill in a post-sanctions era?” ( https://mybs.in/2X678Bx).
One of the first things the new government should do now is revisit the five-year-old formula determining the price of domestic natural gas. It must do so particularly after watching the absurd price movement that is happening now. Where international price of natural gas has slipped close to $4/mmBtu (metric million British thermal unit) from about $9, Indian domestic prices, set every six months, has risen to $3.69/mmBtu, a steep 10 per cent sequential climb.
Indian prices are set on the basis of the weighted average of prices at Henry Hub in the USA, the National Pricing Point in the UK, Canada’s Alberta Gas and Russian Gas, the leading gas production points. The formula came into being in October 2014, implemented by oil minister Dharmendra Pradhan, on the basis of the C Rangarajan committee. The prices it takes on is the average of those prevailing half a year ago. Gas prices in 2018 were much higher than now based on expectations of a robust GDP growth rate worldwide.
The drop in global prices is long-term, just as in the case of oil. Major supply capacity has been added in new producing centres like Australia and the USA, while supply is expanding fast from traditional hot spots like Qatar, Mozambique and Russia. This is discounting the gas tanks that sanctions-hit Iran is sitting on.
Indian domestic prices have already begun to impact costs. Prices of compressed natural gas (CNG) for vehicles and piped natural gas (PNG) for cooking in cities, have been revised upward by downstream companies by over seven per cent. By April 2019, prices of CNG have been raised six times within one year. These add to inflation pressures in the economy while the RBI would expect energy prices to soften instead, distorting monetary transmissions. Fuel and light accounts for 6.84 per cent of the weight in the consumer price inflation basket.
Beyond the current dissonance, there is the larger issue of signals to the investors. The NDA government, just before it announced elections in March, had given out licences in 100 cities to companies for setting up infrastructure to supply PNG and CNG. This infrastructure will come up over the next 10 years. The investors would look for clarity on the future gas prices and that can only happen if the prices are freed from administrative control so they do not offer absurd signals like now. For instance, should they depend on future domestic supply or bank only on imported gas? These have major price implications for the consumer. There is no reason why like the oil sector where prices for the Indian basket change daily in response to international prices, there should not be market-based pricing for natural gas.
In 2014, one of the poll planks for the Narendra Modi-led team was to clean up the pricing mess in the gas sector. That, in turn, was a response to the decade long chaos in the sector where gas pricing was set on political call than economic sense. The prices in vogue included all sorts of variables including whether it was drawn from a government or a private sector company, the vintage of the well, its location from the shore down to who was it being sold to. The current pricing formula, most experts agree is a far better choice than the earlier mish-mash.
As the current trend shows, the jump has to be from here to deregulation to make the gas sector take off in India. The government has made some progress. In early 2016, it announced a Hydrocarbon Exploration and Licensing Policy which made a switch from production or profit-sharing model to a revenue-sharing model for existing fields. It also offered pricing freedom for gas discovered from new wells in deepwater, ultra deepwater, and high pressure and high temperature regions. Yet, this freedom too was made conditional with a ceiling on prices. It has followed it up two years later with the announcement of the “Exploration and Licensing Policy for Enhancing Exploration and Production of Oil and Natural Gas”, in February 2019. The catch is that the policy promises pricing freedom for future discoveries but the existing seven producing basins will continue with the current price regime. In other words, a dual pricing regime again. Since domestic gas prices continue to be controlled, the oil minister has not been able to follow through on his promise to set up an exchange for gas in India on the lines of those abroad, though it makes eminent sense to have one.
India needs more usage of natural gas as an intermediate step to make the switch from coal to renewables. Power stations built for coal cannot obviously become generators of renewable energy but they can very well become gas-based. Out of India’s 350 GW of generation capacity, thermal or coal-based accounts for 223 GW. But those will need fresh investments, which can only be made if the political decisions for the sector, are made now. Of the 100 cities for which Pradhan has handed out licences, the concessionaires are tapping the banks to raise money. An open-ended controlled gas pricing regime will not convince the banks to write those cheques.