In India, gas prices are primarily governed by the cost of sourcing. The price of gas sourced from domestic terminals is calculated by a formula, which was established in 2014. The domestic gas price is linked to the weighted average price of global benchmarks (the US, the UK and Japan). Meanwhile, the price of imported gas in liquefied form depends on the terms of the contract or the prevailing spot market dynamics. In the past year, the natural gas sector has witnessed poor demand from industries as well as the transport sector, due to the nationwide lockdown imposed to stem the spread of Covid-19. While the commercial and industrial sector registered a decline in consumption, the household sector registered a higher offtake. Due to poor demand, natural gas prices have been slipping to new lows, not only in India but across the world.
Domestic prices in India
In October 2014, the government announced a new gas pricing formula using the weighted average of prices. The prices for major international gas trading hubs – the US Henry Hub, the UK National Balancing Point and Japan’s customs-cleared rate – were considered for calculating the domestic prices. The price of domestically produced gas is revised periodically to mirror international price trends.
The government has been reducing the price of domestically produced natural gas since September 2019, when it lowered domestic natural gas prices by 12.5 per cent to $3.23 per million metric British thermal units (mmBtu). In the next revisions, the price of domestic gas declined by a sharp 25.1 per cent to $1.79 per mmBtu owing to higher production and coronavirus-induced low demand.
As per the latest updates, the Ministry of Petroleum and Natural Gas has kept the price of domestically produced natural gas unchanged at $1.79 per mmBtu (on a gross calorific value basis) for the period April 1, 2021, to September 30, 2021. Meanwhile, for the natural gas produced from difficult fields, like deep water, ultra deep water, and high pressure high temperature areas, the price has been reduced to $3.62 per mmBtu, 10.8 per cent lower than the price ceiling of $4.06 during October 2020-March 2021. The decision to keep the gas price unchanged is expected to keep the costs of cooking fuels and public transportation in check. It will also have an impact on oil producing companies like and Oil and Natural Gas Corporation, Oil India Limited and GAIL.
R-LNG import pricing trends
In India, nearly half the gas demand is met through liquified natural gas (LNG) imports. The country started importing LNG in 2004 and its gas imports have been rising consistently owing to falling domestic output. During the period 2017-21, LNG imports increased from 24,849 million metric standard cubic metres (mmscm) to 32,861 mmscm at a compound annual growth rate of 7.24 per cent. This is in sharp contrast to the government’s vision of reducing import dependence. Of late, there has been a yawning gap between long-term and spot prices for LNG.
LNG prices registered a major decline from 2014 till 2016, after which they started rising, up to 2019. The prices witnessed a steep decline 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 was exacerbated further with the recent pandemic, pushing Asian spot prices to $2-$3 per mmBtu. The agreed prices further reduced to $1.3 per mmBtu (May 22, 2020). Showing mild signs of recovery, the spot price of cargoes for the October 2020 delivery rose to $4.5 per mmBtu.
Prices have witnessed a rise in recent months. Cargoes for the May 2021 delivery into Northeast Asia were priced at about $7.3 per mmBtu. Further, the average LNG price for the June 2021 delivery into the region is estimated at about $10.15 per mmBtu. According to traders, the price for the July delivery is estimated at about $10.25 per mmBtu, almost twice as much as the February 2021 level ($5.6 per mmBtu). Meanwhile, after a slump in Japan spot LNG prices during April 2020-November 2020, the prices started increasing from December 2020 onwards, and peaked in January 2021. This was again followed by a fall in prices from February till April 2021.
What lies ahead
The current pricing scenario, affected by the pandemic, was never predicted. It presents a chance to revisit gas pricing for domestic fields. The 2014 formula has often discouraged domestic gas production due to the lack of economic incentives. While it favours consumers, it puts gas producers under major stress. The natural gas sector is yet to be brought in the ambit of the goods and services tax. The prevailing conditions point towards the need for a renewed focus on fixing the domestic gas price and tax regime in order to benefit both consumers and producers.