1. Column: Killing the gas fields

Column: Killing the gas fields

Soon, the prices may reach a point where already-approved gas developments may also turn non-commercial.

By: | Updated: March 27, 2015 1:00 AM

Only a small fraction of India’s domestic natural gas (DNG) is consumed by the end-users for vehicles or cooking. In both the cases, it is a replacement-fuel—for petrol, diesel or LPG, all fuels that are much more expensive. A switch-over, even at RLNG prices, will therefore lead to big savings for the consumer. Intermediary industries, such as chemicals, fertilisers and power—remain the major consumers of DNG. The gas is used either as a raw material for constituent molecules or as a fuel. Thus, despite being essentially an industrial product (in India), DNG and its price tend to occupy the mindscape across a wide spectrum of the society.

Petrol and diesel have been freed from government pricing. In the case of DNG, the government has moved in the reverse direction. An item produced in a contractual, free-market regime has been brought under administered pricing and allocation. The current pricing regime originates from the government notification of October 2014. This, inter alia, makes the biannual price announcements. Price for the next six months is to be based on a weighted average of Henry Hub (US) price, Alberta Hub Price and Russian FTS price for various destinations, besides NBP. The figures used for calculations shall be from the previous six months. Unlike India, the first three prices are from gas-surplus (even gas-flaring) markets.

The announcement of the rates applicable for the next six months is now due. There is wide speculation in the media on the likely numbers and trends. Two important factors, in this connection, are the global hydrocarbon prices and the relative strength of the dollar and the Russian rouble.

Current oil prices are at a 50-60% level of the prices a year ago. The rouble-to-dollar quote is around 60-70% considering the same time-frame. The rouble fluctuation compounds the impact of Russian price changes. The combinations of economic and political factors as well as the demand-supply equation in the market indicate that the southward pressures on gas prices will continue. The position is even likely to become worse given the increased need of the Russians for hard currency and the reduction of refinery discounts. Social commitments in other producer economies, the aggressive Saudi position to sustain their market share, and the continued weakness of Chinese demand accentuates the demand-supply imbalance. An agreement with Iran can lead to another 10% drop. The likelihood of a double-dip price reduction in hydrocarbons is therefore not ruled out.

The Russian prices in our gas price calculations are quoted in roubles/scm. With continued weak oil, the rouble decline is also likely to continue. This will lead to a double-whammy for Indian gas producers.

Considering the above factors, the expected price for summer 2015 should decline sharply. If the same trend continues, the price for winter 2015 could be close to the old administered price of $4.20.

Clearly, the consumers should rejoice. Or, should they? Let’s review the last six months. In October 2014, when the current prices were announced, the Gujarat State Petroleum Corporation (GSPC) was on the verge of starting production in the K-G basin. However, the unexpected low price, far below the discovered “arm’s length” price, severely challenged the difficult economics of the DeenDayal field, thereby impacting production and future development. This reduced availability has been made up with additional LNG imports. These came at roughly double the price. Similar price uncertainties on new discoveries have slowed the development process of large number of discoveries acknowledged by the directorate-general of hydrocarbons. For the country and consumers—whose demands are only partially met from domestic sources—this means higher imports at higher prices for a long duration. On the other hand, it pushes up the domestic supply decline, compounding the impact. Pretty soon, the prices may reach a point where other, already-approved gas developments may also turn non-commercial. Each such decision means larger imports, higher cost to the consumers and higher transfer of funds overseas.

Lower hydrocarbon prices normally lead to lower services costs, though with a time lag. In some quarters, there is an expectation that the drop in cost of exploration will adequately compensate the fall in prices. Logically, it is true if the prices remain depressed over a sufficiently long time. However, it doesn’t bring succour to the current production. More critically, the margin of sale price above the breakeven price is proportionately reduced. This again means exploration is less attractive, except in the most prolific and low-costs basins. India does not have such luxury. In addition, the reduction of the upside because of administered price also means that we cannot attract companies with exploration in their DNA (of the high-risk, high-reward profile).

Perhaps, the higher outgo of forex, on account of higher gas imports, and the consequent weakening (or lower appreciation) of rupee can be counted as the positive unintended consequences. Meanwhile, the perception created about the lack of sanctity of Indian contracts continues to downgrade India as an exploration-destination. The ensuing reduced activity will also mean a reduced interest to move to India for manufacturing/servicing activities that have upstream as a base. This is certainly not a positive push for the Make-in-India campaign.

It is therefore imperative that the move to gas-on-gas competition required by the production sharing contract (recommended by various Committees and supported by the industry) be brought on to the front-burner, and the steps for transition started in this “favourable” juncture, of a ‘low costs’ scenario. The industry shall take the downswings cheerfully if the upswing gains are fully assured. Then, exploration and development will not lose momentum due to these temporary fluctuations.

The author is secretary-general, AOGO

Tags: Domestic Gas
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