Gas price hike in India – Will it really lead to more investments?

Indian government’s decision to double the gas prices has set the stage for pragmatic arguments. While critics of the government decision say that the hike in the price would largely benefit the Reliance group, Centre continues to claim that the gas price hike will lead to more investments in oil and gas sector, higher output of domestic gas, lesser imports and help in addressing global warming concerns.

Let us see what is happening today. There are two kinds of sources to meet our demand for gas – domestically produced gas and imported gas in the form of Liquefied Natural Gas (LNG). India’s demand for gas is of the order of 168 million metric standard cubic meters per day (mmscmd), of which 95 mmscmd is met through domestic supply, 40 mmscmd is met through LNG imports and rest 33 mmscmd still goes unmet. The domestically produced gas is available at a price of USD 4.2/Million British Thermal Units (USD/MBtu) and LNG is imported at a price of USD 14/MBtu. So 57% of the demand is met by gas available at USD 4.2/MBtu. As we all know, India has raised its gas prices from USD 4.2 to USD 8.4/MBtu last week. Even if all of us go by the claim that this will lead to more investments and our demand will be met by domestic supply, there are two major concerns. One, can the price sensitive Indian consumer afford gas at USD 8.4 when he was already striving to buy at USD 4.2? And two, even if we aim to meet our demand by domestic supply, there has to be ~70 mmscmd of extra domestic production and this will also just equate the overall money Indian consumers used to and will spend on buying gas. Clearly, our government looks far more optimistic than you and me.

Let us go back in time and see what happened in 2010. India had a dual gas pricing and supply policy, with APM gas (Administered Price Mechanism) produced by state-owned companies and non-APM gas from private companies and joint ventures. Until May 2010, prices differed widely for APM and non-APM. In 2010, the price of APM gas increased from USD 1.8/MBtu to USD 4.2/MBtu, a price level similar to KG-D6 gas. We will now go deeper into one of these state-owned companies, Oil India Limited. A close look at the numbers from FY 10 to FY 11 shows that the production of natural gas went down, sales of natural gas went down while profits for natural gas enjoyed a steep rise over the year.

This number of 4.2 was decided based on a pricing formula proposed by Reliance in 2010 and the new number of 8.4 is based on a pricing formula proposed by Rangarajan Committee this year, which says that the price of natural gas in India will be an average of imported LNG and average price at global hubs – Henry Hub, National Balancing Point and Japan Korea Marker. We are trying hard to digest how the changes in different parts of the world will affect the price of gas produced domestically in India, be it a drought in Brazil, a fluctuation in import volume by Argentina or an interrupted production in Nigeria.  How should it be affecting our domestic production meant for our domestic demand? Or the government is being even more optimistic and looking at India exporting gas to these places. We believe that it is our right to know and understand why such pricing formulas are not applicable in other parts of the world and those parts still attract sufficient investments.

Above all this, when we look at the demand side, 64% of the demand for gas is made by the power industry and the fertilizer industry. So the electricity prices are going to rise, urea prices are going to shoot up and all of this will come down to the end consumer. While the government hints at increasing subsidies for these sectors, we see two concerns again – one, how will increasing subsidies help in achieving the aggressive target of fiscal deficit reduction and two, the working capital requirements will go significantly up in case of delays in subsidy payments, as observed in the recent past. Unless we resolve these issues, we doubt if our government should even be discussing the power industry moving from coal based to gas based generation and hence a cleaner environment.

The impact of all of this looks crystal clear. We, the common people, are going to strive even harder to buy gas to satisfy our needs and I see this burden translating into windfall profits for the gas producers especially the private ones.


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