The government is seriously considering switching over to pooled gas pricing in a bid to bring some sort of uniformity in prices for the supply of natural gas to customers in different sectors. The Indian natural gas market is highly fragmented owing to prevalence of different prices for different industrial sectors. The idea behind the government’s plan to introduce pooled pricing, at least for specific sectors if not across the board, is to pave the way for the integration of the domestic gas market. This is a well-intentioned move but may not help in the development of the Indian gas market. Rather, there is a risk that it might end up retarding the growth of the market.
India took a significant step forward with the institution of a national exploration licensing policy (Nelp) that has led to several major gas discoveries and dramatically changed the domestic gas availability scenario. For example, Reliance Industries Limited’s (RIL) D6 block in the Krishna-Godavari (KG) basin now accounts for 32% of the country’s natural gas production. The Nelp regime allows contractors freedom to sell gas at market determined prices. However, contractors need to discover a market price through an arm’s length transaction. If the government shifts to pooled gas pricing, this route for price discovery would get foreclosed.
There are four main sources of domestic gas supply in India—APM gas, gas available from pre-Nelp blocks, Nelp blocks and imported LNG. The price of APM gas is $2.2 per million British thermal unit (mmbtu), gas from pre-Nelp blocks costs $5 per mmbtu, gas from RIL’s D6 Nelp block is priced at $4.2 per mmbtu and spot LNG at $6-7 per mmbtu.
As a common practice, contractors invite bids from gas consumers to discover market prices. However, if the government decides to pool the gas available from all these sources to work out a single price for consumers in a particular sector, there will be no way left for producers to discover market prices.
The government has set landfall price for gas from RIL’s D6 block at $4.2 per mmbtu. If the private contractor is still able to make profit, it is because of economies of scale. If the production capacity of the block were less than 25 million standard cubic metre per day (mmscmd), it would not be viable for RIL to supply gas at that price.
This is the reason private gas producers are wary of the government’s intervention in setting prices for their gas production. Some of them have already started going slow on development work for their discovered fields. This is likely to delay supply of additional gas from the concerned blocks.
There is also a risk that the pooled gas price mechanism would lead to institutionalisation of government intervention in the determination of natural gas prices, eroding investor confidence in India’s oil and gas exploration regulatory regime. Oil and gas players take their investment decisions based on the consistency of the regulatory regime. If they lose confidence in the Indian policy regime, private investors’ outlay on domestic oil and gas exploration might start drying up. If that happens, it would really jolt India’s energy security goal.
Currently, APM blocks account for 30% of India’s domestic gas supply. Gas production from APM blocks is declining. Meanwhile, share of non-APM gas is expected to rise as more Nelp blocks go onstream in the coming years. So, consumers in key sectors like power and fertiliser will have to increasingly depend on non-APM gas to meet their feedstock or fuel requirement.
Most of the new discoveries are being made in offshore areas, especially deep waters where cost of producing gas is much higher. For example, cost of production from onshore fields in India works out to $2 per mmbtu. In comparison, the average cost of production from offshore blocks is estimated at $3-4 per mmbtu. Besides, evacuating gas supplies from offshore sites also involves higher capital expenditure.
While domestic gas availability is expected to be comfortable until 2014, demand is likely to overtake domestic gas supply beyond that, necessitating stepping up of costlier LNG imports in a significant manner. Since India is importing only a limited quantity of LNG under long-term contracts, it will have to access spot markets for additional LNG supply. Price of LNG available under short-term contracts tends to be higher and also more volatile as it closely follows the international crude oil market.
If there is volatility in the global crude oil market, the difference between the price of imported LNG and pooled gas could rise sharply. To maintain the pooled gas price at a moderate level, the government might be tempted to force private Nelp contractors to hold down their prices. There is, therefore, fear that private gas producers might end up bearing the subsidy that would be required for maintaining credibility of the pooled price system in times of high crude oil prices.
As India’s natural gas demand is projected to grow at a much faster pace than availability from domestic sources, a sensible policy would be to encourage bulk consumers to meet a part of their gas requirement through imports. Through long-term contracts, bulk supply of imported LNG can be tied up at reasonable prices. This would help in increasing overall availability of natural gas in the country and encourage a shift from dirty coal towards cleaner fuel, particularly by industries that can afford such a shift. At the same time, it will also force those industries that cannot afford natural gas to shift their attention to using washed coal instead. This would help the coal industry to better plan its coal washing capacity. Such a scenario will see India making a better use of its energy mix, without compromising its emission reduction goals.
Production from APM gas fields of ONGC and OIL is declining. Public sector companies are not making the investments required to restore gas production, as they are selling gas at prices which are lower than production costs. If gas were not available from RIL’s D6 block, the country would be facing a huge gas supply shortfall.
It is unfortunate that the government has not learnt any lesson from the APM gas policy’s failures. Instead of focusing its attention on removing natural gas supply bottlenecks, it is busy exploring opportunities to regulate gas prices. This does not augur well for the future of the Indian gas market....
Source: Financial Express
___________________________________________________________________________
India took a significant step forward with the institution of a national exploration licensing policy (Nelp) that has led to several major gas discoveries and dramatically changed the domestic gas availability scenario. For example, Reliance Industries Limited’s (RIL) D6 block in the Krishna-Godavari (KG) basin now accounts for 32% of the country’s natural gas production. The Nelp regime allows contractors freedom to sell gas at market determined prices. However, contractors need to discover a market price through an arm’s length transaction. If the government shifts to pooled gas pricing, this route for price discovery would get foreclosed.
There are four main sources of domestic gas supply in India—APM gas, gas available from pre-Nelp blocks, Nelp blocks and imported LNG. The price of APM gas is $2.2 per million British thermal unit (mmbtu), gas from pre-Nelp blocks costs $5 per mmbtu, gas from RIL’s D6 Nelp block is priced at $4.2 per mmbtu and spot LNG at $6-7 per mmbtu.
As a common practice, contractors invite bids from gas consumers to discover market prices. However, if the government decides to pool the gas available from all these sources to work out a single price for consumers in a particular sector, there will be no way left for producers to discover market prices.
The government has set landfall price for gas from RIL’s D6 block at $4.2 per mmbtu. If the private contractor is still able to make profit, it is because of economies of scale. If the production capacity of the block were less than 25 million standard cubic metre per day (mmscmd), it would not be viable for RIL to supply gas at that price.
This is the reason private gas producers are wary of the government’s intervention in setting prices for their gas production. Some of them have already started going slow on development work for their discovered fields. This is likely to delay supply of additional gas from the concerned blocks.
There is also a risk that the pooled gas price mechanism would lead to institutionalisation of government intervention in the determination of natural gas prices, eroding investor confidence in India’s oil and gas exploration regulatory regime. Oil and gas players take their investment decisions based on the consistency of the regulatory regime. If they lose confidence in the Indian policy regime, private investors’ outlay on domestic oil and gas exploration might start drying up. If that happens, it would really jolt India’s energy security goal.
Currently, APM blocks account for 30% of India’s domestic gas supply. Gas production from APM blocks is declining. Meanwhile, share of non-APM gas is expected to rise as more Nelp blocks go onstream in the coming years. So, consumers in key sectors like power and fertiliser will have to increasingly depend on non-APM gas to meet their feedstock or fuel requirement.
Most of the new discoveries are being made in offshore areas, especially deep waters where cost of producing gas is much higher. For example, cost of production from onshore fields in India works out to $2 per mmbtu. In comparison, the average cost of production from offshore blocks is estimated at $3-4 per mmbtu. Besides, evacuating gas supplies from offshore sites also involves higher capital expenditure.
While domestic gas availability is expected to be comfortable until 2014, demand is likely to overtake domestic gas supply beyond that, necessitating stepping up of costlier LNG imports in a significant manner. Since India is importing only a limited quantity of LNG under long-term contracts, it will have to access spot markets for additional LNG supply. Price of LNG available under short-term contracts tends to be higher and also more volatile as it closely follows the international crude oil market.
If there is volatility in the global crude oil market, the difference between the price of imported LNG and pooled gas could rise sharply. To maintain the pooled gas price at a moderate level, the government might be tempted to force private Nelp contractors to hold down their prices. There is, therefore, fear that private gas producers might end up bearing the subsidy that would be required for maintaining credibility of the pooled price system in times of high crude oil prices.
As India’s natural gas demand is projected to grow at a much faster pace than availability from domestic sources, a sensible policy would be to encourage bulk consumers to meet a part of their gas requirement through imports. Through long-term contracts, bulk supply of imported LNG can be tied up at reasonable prices. This would help in increasing overall availability of natural gas in the country and encourage a shift from dirty coal towards cleaner fuel, particularly by industries that can afford such a shift. At the same time, it will also force those industries that cannot afford natural gas to shift their attention to using washed coal instead. This would help the coal industry to better plan its coal washing capacity. Such a scenario will see India making a better use of its energy mix, without compromising its emission reduction goals.
Production from APM gas fields of ONGC and OIL is declining. Public sector companies are not making the investments required to restore gas production, as they are selling gas at prices which are lower than production costs. If gas were not available from RIL’s D6 block, the country would be facing a huge gas supply shortfall.
It is unfortunate that the government has not learnt any lesson from the APM gas policy’s failures. Instead of focusing its attention on removing natural gas supply bottlenecks, it is busy exploring opportunities to regulate gas prices. This does not augur well for the future of the Indian gas market....
Source: Financial Express
Posts
No comments:
Post a Comment