India’s hydrocarbon industry wants domestic natural gas to be priced at at least $7/MMBTU to make its exploration and production efforts economically viable. Accepting such a demand would essentially mean subsiding India’s power and fertilizer sector because these two sectors are the major consumers of domestic gas. But, accepting the industry’s demand “would allow a viable gas market to develop in India, one that operates on the demand and supply principle,” says Phani Sekhar, fund manager, Karvy Capital. Perturbed by the government’s recent decision to reduce the price of natural gas to $3.82/MMBTU from $4.66/MMBTU, India’s exploration and production (E&P) companies want the government to revisit the controversial gas pricing formula that will set a benchmark for gas prices in India by averaging the prices in gas surplus markets of US, Russia and Canada. Such a price cannot be applied in a market like India which essentially is a gas deficit or gas importing country, says FICCI.
Setting the right price for natural gas — one that satisfies all stakeholders — has become a challenge for the Indian policy makers. While lowering the gas prices may be in line with the government’s commitment to provide affordable energy to various consumer segments, “but it entirely ignores the industry’s interest and would certainly act as a deterrent to invigorate the domestic upstream sector,” adds FICCI. Analysts opine that if gas prices remain depressed, PSUs and private operators would not be committed to new investment.
“The pricing regime in India does not reward the exploration and production risks undertaken by the upstream companies,” says R.S. Sharma, former chairman of ONGC. Moreover, regulating the gas prices goes against the spirit of the New Exploration and Licensing Policy (NELP) envisaged in the late 1990s to attract the private sector’s efficiencies to explore India’s unexplored hydrocarbon reserves. Market-linked prices and marketing freedom have been the hallmark of NELP, he adds.
Analysts reason that remunerative gas prices would bring in much required technology and risk capital from global majors to tap nearly two-third of India’s unexplored resources, majority of which lie in the deep and ultra-deep water basins. In the longer term, more domestic gas would turnaround about 15,000 MW of gas based power generation projects that currently lie stranded for want of gas. Such turnaround would solve the non-performing assets problem of Indian banks who had lent heavily to the power sector. Besides reducing the pressure on the polluting but cheaper thermal capacities, it would also address the larger aim of making the environment clean.