Gas prices in India typically depend on where the gas is sourced from. While prices of imported gas in liquefied form depend on the terms of the contract or the prevailing spot market dynamics, prices of gas from domestic fields are governed by a formula that has been in place since 2014.
Recent times have been marked by poor demand for natural gas from industries as well as transport segments that came to a standstill due to the nationwide lockdown implemented to stem the spread of COVID-19. The only exception was higher offtake from the household segment. Amidst poor demand, not only in the country but also across the world, natural gas prices have been slipping to new lows.
Domestic gas prices
In October 2014, the government announced a new gas pricing formula using the weighted average of prices in three major international gas trading hubs – the US Henry Hub, the UK National Balancing Point and Japan’s customs-cleared rate. Domestically produced gas is priced based on this formula, which is revised periodically to mirror international price trends.
In the latest revision carried out in March 2020, India reduced the domestic natural gas price to $2.39 per million metric British thermal units (mmBtu), the lowest under the 2014 domestic gas pricing regime. The ceiling price for gas from difficult fields such as deepwater, ultra-deepwater and high pressure-high temperature areas was reduced to $5.61 per mmBtu from the earlier $8.43 per mmBtu. Plunging prices have resulted in it making little economic sense to draw gas from domestic fields. Marquee players such as the Oil and Natural Gas Corporation have voiced concerns regarding the current price capping system. The price that has been set in the latest revision ($2.39 per unit of gas) is 37 per cent lower than the cost of production.
LNG price trends
India began importing liquefied natural gas (LNG) in 2004 and is currently the fourth largest LNG importer globally with a share of 7.1 per cent in total LNG imports. The country’s gas imports have been rising consistently owing to falling domestic output. This has been in sharp contrast to the government’s vision of reducing import dependence. From 21,389 million metric standard cubic metres (mmscm) in 2015-16 to 33,680 mmscm in 2019-20, LNG imports have risen sharply, meeting over half the natural gas requirements in the country at present. Of late, there has been a yawning gap between long-term and spot prices for LNG.
Globally, gas prices remained depressed in 2019 owing to increased production, commissioning of new LNG export infrastructure and tepid demand from key Asian markets such as China. For India, the source of LNG and the type of contract determines its price. It imports LNG through a mix of long-term and short-term contracts as well as on a spot basis. Currently, prices under long-term LNG contracts are in the range of $6.95-$8.5 per mmBtu.
With regard to spot prices, over the past five years, there has been a steep fall in prices owing to a glut in the global LNG market. Asian spot prices averaged $5.49 per mmBtu in 2019, the lowest in the past decade. The price decline has been exacerbated further with the recent pandemic, pushing Asian spot prices to $2-$3 per mmBtu. In the latest spot deals for LNG, agreed prices have softened further to $1.3 per mmBtu (as of May 22, 2020).
In sum
While the current scenario, marked by the pandemic, was never foreseen, it presents a chance to revisit gas pricing for output from domestic fields. The 2014 formula has often discouraged domestic gas production due to lack of economic incentives. Moreover, natural gas is yet to be brought under the ambit of the goods and services tax. Thus, prevailing conditions point towards the need for a renewed focus on fixing the domestic price and tax regime for the fuel.
For LNG, as spot prices are slipping sharply, a strong case for a renegotiation of long-term contracts is emerging, presenting an opportunity for high gas consuming markets such as India to take advantage of the current scenario.