Pricing Trends

Drop in crude and LNG prices augurs well

The hydrocarbons sector in the country follows a dual pricing strategy comprising regulated pricing as well as market-based mechanisms. The domestic supply of oil and gas is insufficient to meet demand and the government’s role in setting prices and allocating resources is thus crucial. Some important policy announcements have been made in the recent past reviving hope for producers, as they will have greater pricing freedom for their output.

Indian Infrastructure examines pricing trends across the natural gas, crude oil, petroleum products and liquefied natural gas (LNG) segments…

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Natural gas pricing

Natural gas that is consumed in the country can be divided into two categories: domestically produced and that which is imported in the form of LNG and regasified for final consumption. The price of domestic natural gas is determined in accordance with the New Domestic Natural Gas Pricing Guidelines, 2014. As per these guidelines, the base price of domestic natural gas supplied is the same for all consumers irrespective of their location and sector, except in the north-eastern region where the rate is 60 per cent of the notified rate for certain allocations. Imported regasified LNG is supplied by various gas suppliers/importers at market-determined prices and the government does not control these prices.

Domestically produced gas, which is produced by public sector units (PSUs), is allocated to specific customers and sold under the administered pricing mechanism whereas gas produced by joint ventures/private companies is sold as per production sharing contracts (PSCs). Over the past few years, natural gas pricing policies have undergone several changes and reforms. Recently, the government introduced the Policy for Marketing and Pricing Freedom for New Gas Production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas. Under this policy, producers will be allowed marketing freedom (including pricing freedom) for all discoveries in deepwater/ultra-deepwater/high temperature/ high pressure areas which are yet to commence commercial production, as on January 1, 2016 and for all future discoveries in such areas.

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However, in order to protect user industries from sharp increases, this pricing freedom will be accompanied by a price ceiling based on the opportunity cost of imported fuels. The ceiling price will be lowest of:

  • landed price of imported fuel oil
  • weighted average import landed price of substitute fuels (coal, fuel oil and naphtha)
  • landed price of LNG.

These prices will be reset semi-annually. This price cap, at current prices of the fuels that form part of the equation, works out to around $6-$7 per million British thermal units (mmBtu) of gas, which is significantly higher than the $3.8 per mmBtu, which is the current price of natural gas as fixed by the government using a dynamic pricing formula. This formula takes into account prices in gas-surplus countries such as the US, Canada and Russia. For the period April-September 2016, the price ceiling is $6.61 per mmBtu on a gross calorific value (GCV) basis.

Besides, the Hydrocarbon Exploration and Licensing Policy (HELP) approved in March 2016 calls for “marketing and pricing freedom” for gas. Under HELP, a gas-producing company will have the freedom to price and market the resource produced in the domestic market on an “arm’s length” basis. To safeguard the government’s share of revenue, the price will be calculated based on the higher of the prevailing international crude price and the actual price.

Oil pricing

The price of crude oil in the country is determined by the Indian basket, which is the weighted average of the price of Oman and Dubai sour crude price benchmarks and the Brent (dated) sweet crude price benchmark. The Petroleum Planning and Analysis Cell (PPAC) revises weights periodically and for 2014-15, the ratio of Oman and Dubai prices to Brent crude prices was held at 72.28 to 27.72 (latest figures available). Historically, the weights have shifted to Oman and Dubai crude from Brent crude as India imports most of its oil from the Middle East.

Plunging crude oil prices have helped India save massive foreign exchange reserves. The prices fell from over $100 per barrel in 2011-12 and 2012-13 to about $28 per barrel in January 2016. Thereafter, however, there has been a continuous correction.

Petroleum products pricing

Public sector oil marketing companies (OMCs) pay trade parity prices to refineries for diesel and pay import parity prices for kerosene and liquefied petroleum gas (LPG) meant for the public distribution system.  Retail prices ought to be fixed on the basis of this cost. However, retail prices are modified by the government and are pegged much lower. The difference between the required price based on trade parity/import parity and the actual selling price realised (excluding taxes and the dealer’s commission) represents the under-recoveries of the OMCs.

Taking into consideration key products, the pricing trend has been mixed. The price of petrol in Delhi stood at Rs 66.93 per litre on June 16, 2015 and was reduced to Rs 65.65 per litre on June 1, 2016. The price of diesel in Delhi stood at Rs 50.93 per litre on June 16, 2015 and increased to Rs 53.95 per litre on June 1, 2016.

LPG cylinders continue to be one of the most heavily subsidised petroleum products in India. The government has decided to restrict the supply of subsidised LPG cylinders to 12 per year for each consumer. In Delhi, as of June 1, 2016, the price of subsidised LPG stood at Rs 548.50 (under the Direct Benefit Transfer of LPG Scheme). Kerosene prices have also remained low in the past decade, varying from Rs 10 to Rs 15 per litre. In Mumbai, the price of kerosene stood at Rs 15.42 per litre on March 13, 2016 (Delhi was declared a kerosene-free state in June 2014).

LNG pricing

The price of LNG (imported gas) is not regulated by the government and varies depending on the source of supplies. Sourcing can be done via spot cargoes, which are short-term contracts, or through long-term contracts, which may be spread over a 20-year period. Petronet LNG Limited (PLL), the largest LNG importer in India, buys the resource primarily from Qatar, followed by Australia (under long-term contracts). The company also sources LNG through spot/short-term contracts. The price of LNG bought from Qatar was recently renegotiated owing to a massive difference in the prevailing spot LNG prices and the price at which imports from Qatar were coming in. According to the Ministry of Petroleum and Natural Gas, a revision in the LNG agreement with Qatar has helped bring down the cost of importing natural gas to less than $5 per mmBtu from the earlier $12 per mmBtu.

According to industry experts worldwide, low global LNG prices are here to stay, at least in the near term. Certain developments will drive the trend. On the demand side, Japan, for instance, is restarting its nuclear power plants, which will bring down the demand for LNG (at present, the country is the world’s biggest customer for LNG). Considering the supply side, a significant increase is expected from the US and Iran (as the sanctions on its petroleum industry have been lifted).

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Conclusion

While India has emerged as an important energy market, its energy mix is yet to mature from being coal dominated to increasing the share of relatively cleaner fuels such as oil and gas. Thus, demand is assured. However, the supply dynamics (on the domestic as well as global front) will play a significant role in determining the price of petroleum and its products. Some recent tweaks in the domestic policy framework, of course, hold promise, though it will be a while before this translates into reality on the ground.

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