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Indian gas pricing reform unavoidable, says IHS

Hydrocarbon Engineering,

According to IHS, the long-term distortion of India’s gas pricing regime has brought about a major gas supply shortfall.

Rajiv Biswas, chief economist, Asia Pacific at HIS, commented: “India’s economy is fragile, struggling with low growth and high inflation. 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. The current set of policy reforms increases the price of domestically produced gas, thereby stimulating additional domestic exploration at a time when business and consumer sentiment is fading, investment inflows have slumped and manufacturing is in recession”.

A recent study, ‘India Gas Pricing: When Reform Become Unavoidable’, highlights that in 2013 India’s GDP growth rate was its slowest in a decade, slowing to 4.5%/y from more than 8%/y in most of the previous decade.

Gas pricing policy demand

According to the 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 increased reliance on LNG imports.

The newly announced gas pricing regime in the country is anticipated to approximately double gas prices to US$ 8.50/million Btu, from US$ 4.20/million Btu in 2010, and is to be maintained for the next five year period.

Kash Burchett, senior analyst at IHS Energy, said: “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 Administered Price Mechanism rate, which more accounts for 35% of it overall supply.

“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 study suggests that by implementing energy reforms and doubling the gas price, the Indian government will allow the Indian gas producers to achieve significant gains, and encourage exploration of more expensive gas fields.

Higher gas prices will ensure sharper economic recovery

IHS Energy has constructed different gas production outlooks under a range of alternative pricing scenarios:

At US$ 4.20/million Btu and with no reforms enforced, the production will stagnate at 3 billion ft3/d and India will need to import approximately 9.7 ft3/d LNG to meet demand.

At US$ 8.50/million Btu, as under the current set of reforms, an additional 1.95 billion ft3/d could come within a decade.

At either US$ 10.50/million Btu or US$ 12/million Btu the supply would grow significantly. For the latter domestic Indian production would reach up to 11 billion ft3/d. This was reduce reliance on LNG imports by approximately 1 billion ft3/d by 2025, securing higher capital flow for India’s economy.

The IHS holds that although the new price outlook implies significant additions from the middle of the next decade, gas production will not recover overnight, but it could stimulate the domestic economy and perhaps ease the call on LNG.

“Higher gas prices would yield additional government revenues, a reduced balance of payments deficit, and improved security of supply”, Biswas said. “It would also 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”. 

Adapted from a press release by Emma McAleavey.

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