Gas imports not to turn cheaper in medium term, show GAILs new deals

Written by Siddhartha P Saikia | New Delhi | Updated: Apr 7 2014, 06:18am hrs
GasCome 2017, GAIL would start getting 4.8 million tonnes of LNG from the US. Reuters
Amid the imbroglio over whether, when and how Indias domestic gas price would be revised and with state-run and private investors increasingly anxious over prices turning ever more unremunerative, medium-term prospects of imported gas prices bring little relief either.

While consumers pay an average of $12-16 per million metric British thermal units (mmBtu) for liquefied natural gas (LNG) imported into the country right now, the new long-term contracts sealed by public-sector GAIL (India) from the US and Russia would make gas available in India at not less than $12-13.50/mmBtu, starting 2017.

Analysts said the scenario calls for the new government at the Centre to accord high priority to resolve the row over the formula for gas pricing in order to spur investments in Indias deep-water and ultra-deep-water acreages, from which investors are shying away. The viability of the gas business in India hinges not only on market-determined price for gas but also on how free power and fertiliser units are in pricing their outputs, they added.

Currently, of the 100-105 million standard cubic metres (mmscmd) of gas consumed by India daily, 70-75% comes from domestic sources and the rest is imported LNG. With domestic output stagnating and demand projected to surge (the BP Energy Outlook report said Indias gas demand would be 183% higher than now by 2035), the country will inevitably rely more on gas imports.

If the the rising oil imports are added to that, the countrys energy sector and government finances looks increasingly vulnerable to external developments. (Till February 2013-14, Indias oil imports bill stood at $133 billion compared with $144 billion in the whole of 2012-13.) There are, of course, some positives like the Oil and Natural Gas Corporations plans to double output of both oil and gas by 2030 (including ONGC Videshs production from overseas ventures) and the prospect of cheaper Canadian crude from its Alberta

oil sands bounty reaching Indian shores in large quantities four years from now.

Come 2017, GAIL would start getting 4.8 million tonnes of LNG from the US. Another 2.5 million tonnes a year would start flowing from Russia by 2020. Currently, GAIL is sourcing gas from Gas Natural Fenosa and GDF Suez at prices hovering around $14/mmBtu.

The price of gas to be exported from the US would be linked to Henry Hub prices, which currently is at around $4-$4.50/mmBtu. The landed price of this gas is expected to be around $11-12/mmBtu. Customers would have to pay an additional 50-60 cents for regassification charges, 50 cents for marketing margins and other levies that differ from one state to another, taking the end-user price in India to about $13-13.50/mmBtu.

According to GAIL, the price at which it would source gas from overseas three years from now would be competitive because the domestic price too is heading northwards. Moreover, there is no certainty about supply from domestic fields such as the Reliance Industries-operated KG-D6 block or even ONGCs new finds.

Currently, there is a wide gap between the price of indigenously produced and imported gas. But if the Rangarajan formula approved by the Cabinet is implemented, the gap would be bridged to an extent. The Cabinet-approved gas pricing regime has been put in abeyance due to an Election Commission diktat and, last week, the Supreme court asked the government to explain why it needed to use the complex Rangarajan formula when it could have adopted simpler alternative methods like cost-plus pricing.

The power and fertiliser companies do not prefer LNG because their end-product price is capped. But there are small and mid-sized industries such as cement, steel, glass making, refineries and petrochemicals, among others, that are willing to buy LNG, as there is no clarity in availability of domestic gas. We called for expression of interests from customers and the response is very good. We are in the process of signing memoranda of understanding with some of them, said a senior official at GAIL, requesting anonymity.

India is expected to witness a significant surge in LNG usage in the next five years, said a recent KPMG study. The global consulting firm envisaged that Indias LNG demand would increase from 12.5 million tonnes a year in 2010 to around 35 million tonnes per annum in 2020. There are significant opportunities in gas transmission given that the government is targeting to expand the city gas network to cover 250 cities by 2020.

Currently, gas produced from domestic fields costs $4.20-$5.70/mmBtu, under the administered price regime. On the other hand, spot prices hover at $15-17/mmBtu, and long-term contracts at $11-12/mmBtu. The end consumer pays another $2-3/mmBtu for regassification (in the case of LNG) transmission, marketing margin and other state government levies.

GAIL is at an advanced stages to tie up gas to the tune of 2.3 million tonnes a year, which would be exported from the Cove Point LNG liquefaction terminal in the US. The government-owned company is also contemplating if a pipeline needs to be built in the US to ferry gas to the LNG terminal located at Lusby in the state of Maryland.

We have almost finalised the gas deals. We need 3.6 mmscmd for the Cove Point terminal, another senior official of the company told FE. He said that the company is looking at various options in the US, including construction of a pipeline.