Gas Price Reforms Have Become Inevitable in India

Lack of gas pricing reforms in India has distorted the market and has brought about a major gas supply shortfall, acting as a brake on economic activity, a report by US based consultancy IHS says.

The report titled ‘India Gas Pricing: When Reform Becomes Unavoidable’, which will be presented at the IHS Singapore Forum on Wednesday, June 11, says the planned increase to the gas prices has a potential to improve India’s balance of payments outlook, enhance security of supply and attract investments into the service industry and supply chain.

“India’s gas pricing reforms represent an important policy shift and should stimulate domestic production, soften growth in reliance on expensive LNG and accelerate India’s economy,” the reports says.

The report also suggests that a change may come with the new Modi government in power, which is likely to be more decisive in pushing through a set of gas pricing reforms that would reshape the incentive structure for upstream oil and gas investments.

“India’s economy is fragile, struggling with low growth and high inflation,” says Rajiv Biswas, chief economist, Asia Pacific at IHS. “One of the key factors underlying the difficult economic outlook is India’s unfolding energy crisis. Unmet gas demand now represents a considerable drag on India’s economy and the cost of maintaining subsidized, low gas prices has become unsustainable,” he says.

According to the IHS study, India’s prior gas-market pricing policies have long distorted India’s gas supply and demand patterns, weakened investment into domestic gas exploration and accelerated inefficient consumption habits. All of these factors have contributed to the country’s reliance on LNG imports, making India the world’s fifth-largest liquefied natural gas (LNG) consumer.

Indian government figures for offshore exploration and production showed investments fell from $6 billion in 2007-08 to US$1.8 billion in 2011-12. Meanwhile the Indian energy firms invested more than triple this value on projects outside of India. The result has been a decline of nearly 60 percent in Indian offshore drilling activity over the 2007-2013 period, the IHS study says.

Newly announced gas pricing regime, which is due to come into effect this year, is expected to roughly double gas prices to $8.50 per million Btu (MMBtu) – from $4.20 per MMBtu in 2010 – and is to be maintained over the next five-year period.

“Until 2004, India met its own natural gas needs, but now the country’s energy supply relies on expensive LNG imports, priced at more than triple the (APM) Administered Price Mechanism rate, which now accounts for 35 percent of its overall supply,” says Kash Burchett, senior analyst at IHS Energy. “The government has begun to deregulate gas prices, but the extent of the reforms is not yet clear. A higher APM rate could pave the way for increased domestic production, reduce the reliance on expensive LNG imports and help foster local industrial supply chain development without compromising the economy’s competitiveness.”

The two regions that remain especially attractive – namely, the deepwater Cauvery Basin off the southeastern coast, and the deepwater Krishna-Godavari Basin – farther north in the Bay of Bengal, could serve as additional gas supply resources as new discoveries and investments were made since the announcement of the higher gas price. In addition, the study finds that looking further ahead unconventional gas production may also be developed in India.

IHS Energy has constructed different gas production outlooks under a range of alternative pricing scenarios. Whilst it is unrealistic to imagine an APM rate beyond $8.50/MMBtu in the near term, it is worth considering higher prices in the range of $10 - $12/MMBtu in the period beyond 2020, it says.

IHS cost modelling analyses suggest:

• At $4.20 per MMBtu and with no reforms enforced, the production will stagnate at 3 billion cubic feet (Bcf) per day and India will need to import around 9.7cf per day LNG to meet demand. The unmet demand would imply a significant drag on India’s economy.
• At $8.50 per MMBtu, as under the current set of reforms, an additional 1.95 Bcf per day could come within a decade.
• At the hypothetical $10.50 and $12 per MMBtu outlooks, the supply would grow significantly. With price set at $12 MMBtu, domestic India production would reach as high as 11 Bcf per day by 2023, which is more than double the projected output under the proposed set of reforms, the scenario predicts.

This would consequently reduce the reliance on LNG imports by a substantial decline to around 2 Bcf per day by 2025, securing higher capital flow into India’s economy coming directly from domestic production, the scenario foresees.

The IHS study says that although the new price outlook implies significant additions from the middle of next decade, gas production will not recover overnight, but it could stimulate domestic economic activity and perhaps ease the call on LNG. Consequently, despite the planned increase in India’s gas price and associated growth in domestic output, in the short term, India’s dependence on LNG imports will inevitably rise through the present decade. The majority of new imports will come from new production sources in North America and offshore East Africa.

“Higher gas prices would yield additional government revenues, a reduced balance of payments deficit, and improved security of supply,” Biswas says. “It also would help India develop an internationally competitive oil and gas service industry and realize positive income and employment effects from the growth of the supply chains.”