Falling Prices: Domestic and import price trends for oil and gas

Domestic and import price trends for oil and gas

The oil and gas industry across the globe has observed significant volatility in prices in recent times. Both crude oil and natural gas prices have exhibited a decline owing to a huge glut in supply. This decrease in global prices has translated into a fall in oil and gas prices for domestic companies. As a result, these companies have reported an increasing trend in the demand for crude oil and imported gas.

Indian Infrastructure takes a look at the major pricing trends in the sector over the past few years…

Natural gas: Global and Indian LNG import trends

Global prices of natural gas have been falling consistently over the past few years owing to the excess supply of gas in the market. The largest price decline has been recorded in North America, with the US Henry Hub price falling to its lowest level since 1999, at $2.46 per million British thermal units (mmBtu). Japanese LNG prices have also fallen significantly from a high of $16.33 per mmBtu in 2012 to $6.94 per mmBtu in 2016 (a decline of about 58 per cent). At the same time, gas prices have also fallen in other international markets such as Canada and Europe.

The trend has also been mirrored in the global spot market for gas. The Henry Hub spot gas price has been decreasing over the past year. While the price more or less hovered in the $2.5-$3.5 per mmBtu range in 2016, for the first five months in 2017 it was in the range of $2.5-$3.3 per mmBtu. However, the price decrease has been much more dramatic in the case of LNG spot prices for Japan. From a high of $13.9 per mmBtu in January 2015, the average LNG spot import price dropped to $5.7 per mmBtu in May 2017, a decrease of about 60 per cent in a period of two and a half years.

Traditionally, the long-term price trend indicates a widening gap between the Henry Hub and Japanese LNG import prices. However, in the past couple of years, this difference has been narrowing. In May 2017, the difference between the two prices was a mere $2.55 per mmBtu vis-à-vis $5.62 per mmBtu recorded in January 2016.

This fall in international prices of natural gas has prompted the import of liquefied natural gas (LNG) by Indian companies. LNG imports in the country more than doubled during the five-year period 2012-17. Reportedly, India has recently overtaken South Korea as the second largest importer of spot and short-term LNG. This spur in demand has mostly been fuelled by the fertiliser, power and city gas distribution sectors. Imports of LNG are thus filling the supply gap created by falling domestic gas production. At present, Qatar, Nigeria, Equatorial Guinea, Australia and the UAE account for the largest share in LNG imports. Qatar alone accounts for about 62 per cent of the LNG imported by India.

Meanwhile, the cost of importing gas to India has also reduced significantly over the past year. This is mainly owing to the negotiation between India’s largest LNG importer, Petronet LNG Limited, and Qatar’s LNG producer, RasGas. The two companies reworked some aspects of their long-term sale and purchase agreement in December 2015. Under the new agreement, starting January 2016, the price of natural gas imported by India will be linked to the market, till the year 2028. The price will also be based on a three-month average of the floor and price ceilings, unlike the earlier five-year average. The take-or-pay clause under the erstwhile agreement between the two companies has also been removed. The new terms of agreement have led to a significant drop in the company’s cost of importing LNG, from $13 per mmBtu to $7 per mmBtu.

Further, to make it even more lucrative for Indian companies to import natural gas from international markets, the central government in Union Budget 2017-18 proposed a reduction in the basic customs duty on LNG imports from 5 per cent to 2.5 per cent.

Natural gas: Domestic production

Meanwhile, domestically produced natural gas in India is priced according to the Domestic Natural Gas Pricing Guidelines approved by the Ministry of Petroleum and Natural Gas (MoPNG) in October 2014. Under the guidelines, gas is priced at a weighted average of international hub prices (US, Mexico, Canada, the European Union, Russia, and countries of the former Soviet Union), with the volumes of natural gas consumed in these hubs representing the respective weights. Over the past two years, with falling global prices, the domestic natural gas segment has also recorded a decreasing trend in prices. From $5.05 per mmBtu during November 2014-March 2015, the domestic natural gas price has fallen to $2.48 per mmBtu for the period April-September 2017.

Meanwhile, since March 2016, the MoPNG has granted pricing freedom to companies producing gas from deepwater, ultra deepwater and high pressure-high temperature discoveries. However, this pricing freedom is subject to a price ceiling which is calculated once every six months. It is based on the landed prices of alternative fuels (such as coal, LNG and fuel oil), where such prices are publicly available. However, where landed prices are not available, a mark-up of 5 per cent is applied to the prices of imported fuels to arrive at the landed price. Subsequently, the price ceiling is calculated as the lowest of the landed price of imported fuel, the weighted average imported landed price of substitute fuels, and the landed price of imported LNG.

The ceiling thus calculated by the MoPNG has varied significantly since the introduction of the pricing freedom policy. While it was $6.61 per mmBtu during April-September 2016, the ceiling was reduced by almost 20 per cent to $5.30 per mmBtu in the October 2016-March 2017 period. For the ongoing April-September 2017 period, the ceiling price has again increased by about 5 per cent, and currently stands at $5.56 per mmBtu.

Crude oil price trends

Crude oil prices in India vary according to market prices in the domestic and international markets. Of late, this sector too has faced considerable price volatility. Prices fell considerably in 2016, and hovered in the range of $45-$50 per barrel during May-November 2016. While this trend was reversed during December 2016-February 2017 when prices rose to $54.86 per barrel, the increase in prices was short-lived. Since March 2017, crude oil prices have again exhibited a decreasing trend. In June 2017, crude oil prices plunged by almost 8 per cent to $46.56 per barrel.


The price volatility in the Indian crude oil and imported LNG sectors is driven by global demand and supply gaps, and international prices. At the same time, pricing policies in the domestic natural gas segment have undergone several changes in the past three-four years. These new policies have aimed at pricing gas more accurately, in line with international prices. Going forward, unless the global oil and gas glut is arrested, both international and domestic prices are expected to continue to fall. This may lead to a further increase in the demand for these resources by Indian companies.