Natural Gas Pricing in India: Availability, Assessability & Affordability
10 Pages Posted: 13 Sep 2012
Date Written: September 11, 2012
In India the natural gas market which has a very slow growth initially during the period of eighties, has now witnessing an asymptotic growth soon after import of LNG in 2004 and KG D-6 gas flow in 2009. India's hydrocarbon vision statement envisages the share of natural gas to be about 25% by 2025. Traditionally the power and the fertilizer sectors require the maximum amount of gas. In the future also the trend is expected to be same. According to a 'Study on Common Pool Price Mechanism for Natural Gas in the country' prepared by Mercados Energy Markets India Private Limited in January, 2010, it was estimated that demand would originate by about 70-75% from power and fertilizer sectors alone.
The power and fertilizer sectors are sensitive to price volatility. Power tariffs are regulated and the fertilizer price is also controlled by the Government. The return on investment is assured by providing subsidies. In both these cases, as a social commitment, the Government considers itself as a major customer and the subsidy is provided through PSUs and the Government treasury.
Generally, the prices of LNG in the Asia Pacific basin are linked to crude oil. This leads to volatility in the prices and higher price levels as compared to existing natural gas supply basket. It thus becomes important to consider alternative arrangements that permit new supplies without compromising the interest of the consumers. One way of assuring this is by pooling arrangements, but it has its own repercussions..
Presently, different prices of natural gas prevail in the country. Before the KG D-6 gas production commenced, almost 40% of the total gas being supplied was based on APM. Even in this, there are different prices which prevailed for the priority sectors, i.e. power and fertilizer, North Eastern region and the non-priority sectors. Another complexity is that seven more types of prices are prevalent for gas coming out of Production Sharing Contracts, be it from PMT, RAVVA, KG basin or other fields. Third category is LNG, which is available broadly at the prices based on buyer-seller contracts.
With limited pipeline Infrastructure, different production costs for conventional and unconventional gas, the gas market still has regional characteristics and a single price throughout the country would be a dream. In addition the transportation tariff and the tax structure have direct bearing on the cost of natural gas to the customer.
This paper reviews the systems and practice adopted in India for Gas pricing and compares them with international practices regarding price pooling, tariff setting and tax structure and tries to analyze the extent to which these can be applied for India. Given the circumstances, a truly market determined price of natural gas would be in the larger interest of the consumers. It would also help to develop the natural gas market in the country.
Keywords: natural gas, pricing, APM, Common pool pricing mechanism
JEL Classification: G18, L71, L95, L98, Q48
Suggested Citation: Suggested Citation