The government is considering a proposal to benchmark natural gas price in the country to an average of the low and high rates prevailing in the world in order to set a realistic price for the clean fuel. The move will encourage more investments in gas exploration and will at the same time be fair to gas-consuming industries like power and fertilisers.
If the proposal is implemented, producers like ONGC and Reliance Industries will be able to realise a better price for gas now being sold at $4.2 per unit, which is less than a third of the prevailing rate in the Asia Pacific region. The current gas price is due for a revision in 2014.
An inter-ministerial panel on natural gas pooling chaired by Planning Commission member Saumitra Chaudhuri has, in its final report, recommended an average of the Henry Hub price (the price at which natural gas futures contracts are traded on NYMEX) and that of the Asia Pacific LNG. Gas price has plummeted in North America to levels like $4 per million metric British thermal unit (mmBtu) due to the abundance of shale gas, whereas the crisis in Japan has made gas dearer in the Asia Pacific region to roughly $14 per unit.
?Re-gasified natural gas (RLNG) now costs roughly $14-16 per mmBtu to importers,? Gail India CMD B C Tripathi told FE. Gail is now planning to set up a natural gas trading unit in Singapore to tap the fast-growing Asian natural gas market. RLNG accounted for 9% of the total gas consumption in the power sector last fiscal, while the fertiliser sector consumed 17% in the same period, said a sector analyst.
?Prima facie, this proposal appears to be a fair principle for pricing natural gas in India in the future, keeping in mind the growth imperatives of various sectors,? said Kalpana Jain, senior director, Deloitte Touche Tohmatsu India.
The pricing proposal under consideration emphasizes that the future natural gas price in India should reflect the opportunity cost of investments in order to boost hydrocarbon exploration activities.
The panel observes that the wide disparity in gas price across world markets offers an arbitrage opportunity and that the prices would eventually converge. The ministerial panel that fixes gas price in the country could rely on a 12-month average of the two variables in order to eliminate the volatility in global prices. The government could take the average of the two prices as a benchmark and apply either a premium or a discount depending on policy considerations to incentivise gas producers and to provide a fair price to the consumer. Now, gas price is linked to crude oil price as both the commodities are substitutable to some extent and their prices move in the same direction over a long period of time. The current price of $4.2 per unit applicable to RIL’s gas from the KG basin was fixed taking crude oil price at $60 a barrel four years ago. Crude price has nearly doubled since then. The government has also increased the price of gas that ONGC is producing from nominated blocks to $4.2 per unit.