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The impacts of new pricing on the Indian energy industry

Hydrocarbon Engineering,


According to EY, India’s natural gas market has so far been adversely affected by the Government’s current gas pricing policy and investment in the upstream sector has declined to US$ 1.8 billion in FY12 from US$ 6.3 billion in FY09.

In contrast, the new gas pricing policy means good things for India’s natural gas market overall. It is expected to increase domestic production by encouraging upstream investment. This will improve India’s energy security and increase availability of gas for its key gas consuming industries. With its implementation, certainty and transparency in pricing of natural gas in the country is expected to increase.

However, this new policy has currently been put on hold.

Upstream

EY expects the increase in natural gas prices to encourage investment in the upstream segment and boost production. It will also improve the commercial viability of marginal, deepwater and frontier fields, which require cutting edge technology and increased capital spending.

According to IHS CERA’s estimates, India’s recoverable gas reserves could increase by 55 trillion ft3 to 91 trillion ft3 at gas prices of US$ 10 – 12/million Btu due to the factors mentioned above.

Increased domestic production due to enhanced commercial viability of gas fields is expected to decrease the prevalent gas supply deficit in India. It could reduce the country’s LNG import bill. According to Morgan Stanley, gas prices of more than US$ 8/million Btu could result in incremental production of nearly 95 million m3/d over 20 years. This would help to reduce India’s LNG import costs by approximately US$ 16 billion.

The proposed gas price hike would help to boost revenues of indigenous gas producers, according to EY. Currently, ONGC, OIL and RIL account for 85% of the total output of domestic gas. According to Moody’s estimates, the proposed increase in gas prices will augment ONGC’s revenue by US$ 1.5 – US$ 2 billion and RIL’s revenue by US$ 300 – US$ 500 million in FY15. Furthermore, the rise in gas prices will augment the Government’s revenue in the form of increased taxes, royalty, profits and dividends.

Increased production of gas will help to alleviate the existing supply crunch, and reduce the country’s reliance on high priced LNG. However, price sensitive sectors such as power and fertilizers may find it difficult to absorb the hike. Therefore, EY holds that there is a need for the Government’s policy to effectively address concerns of the consuming sector.

Power

EY highlights that the power sector is the largest consumer of natural gas in India. Gas powered plants are plagued by high generation costs and a low average plant load factors (PLF).

Currently, approximately 6000 MW of commissioned and 1000 MW of un-commissioned (at an advanced stage of construction and commissioning) gas based power plants are non-functional due to availability of gas.

While the new pricing regime is expected to increase domestic gas supply, which can be used to bring these power plants onstream, the demand for natural gas for gas based power generation remains highly price sensitive. Power plants are currently being supplied APM gas at US$ 4.2/million Btu at a variable cost of ANR2.1 per unit. At a PLF of 50%, this translates into a generation cost of INR4.8 per unit for new commissioned plants owned by private players.

The increase in gas prices to US$ 8.4/million Btu is expected to result in a rise in its variable cost of INR2 per unit and increase the total cost to INR6.7/unit. This will only make it affordable for peak load purposes. Furthermore, it will be difficult for the companies to switch from natural gas to coal due to high conversion costs, a longer gestation period, their reliance in imported coal and environmental constraints.

City gas distribution sector

The CDG has witnessed rapid growth in recent years. According to EY, the sector will continue to create a demand due to the addition of gas networks in new cities, the price advantage of CNG over auto fuels and increased use of PNG in the domestic, industrial and commercial sectors.

However, the new gas pricing policy will increase sourcing costs for CGD companies with a high APM gas allocation. CGD companies are expected to witness a decline in their earnings due to an increase in their input costs. These companies are unlikely to pass on the increase in gas prices to industrial and domestic consumers due to their limited headroom with alternative fuels (domestic LPG and furnace oil). The new gas pricing will not have a significant impact on operations in regions with a predominant mix of LNG in their sourcing of gas e.g. India’s western region. This is because CNG prices are already high in such geographies.

The threat if depreciation of currency will continue to be a cause for concern, according to EY, since the cost of sourcing is dollar dominated. Overall, increased availability of domestic gas from new projects is likely to increase investors confidence in the sector.

Fertilisers

In the fertilizer sector, increased gas prices would result in a rise in feedstock costs and working capital requirements.

Nevertheless, any rise in domestic gas production will be a positive development in the fertilizer industry, since it enjoys a top priority position for allocation of gas, according to EY. In addition, this would reduce the industry’s dependence on high priced LNG.

According to a report submitted by the Government’s Parliamentary Standing Committee on Finance, production costs would increase by INR1384/t with every rise of US$ 1/million Btu in gas prices. Consequently, this would lead to an increase in the Government’s subsidy burden. An increase in gas prices to approximately 8.4/million Btu will increase the Government’s subsidy burden by INR120 billion (US$ 2 billion). This subsidy burden can be offset by additional revenues received by the Government from increased royalty, profit sharing and tax collection from upstream operations expected in development of new gas resources.

Petrochemicals and other consuming sectors

The petrochemicals sector uses natural gas to extract ethane and produce polyethylene, propane and butane for production of LPG. Input costs account for approximately 80% of manufacturing costs. According to EY, increased gas prices would mean reduced profitability for petrochemical companies. This would also hold true for other industries such as ceramics and glass.

On the other hand, companies that have replaced expensive fuels such as naphtha and diesel with natural gas will stand to benefit from this revision, since it will remain competitive at revised prices. Refining would remain unaffected from the hike in prices, since the sector meets most if its demand from imported gas or naphtha.


Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/15102014/potential-effects-of-india-gas-price-hike-1423/


 

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