Policy
Sri Lanka’s Exploration Acreage May Trigger Fresh India, China Differences
more...


India’s Expanding Oil Trade With US, Crude Import, Products Export
more...


Diesel Prices In Global Markets May Go Up, RIL, NEL To Benefit
more...


India’s 4-Plank Strategy For Energy Security As Crude Imports Surge
more...


IndianOil Embarks On Net-Zero Journey, To Cost Rs 2000 Billion
more...

Regulation
OMCs To Be Compensated For Their Losses In Petrol, Diesel Sales
more...


Regulator PNGRB Wants Control Over Product Pipelines
more...


India To Have Ethanol Dispensing Pumps: Minister In A Hurry?
more...


India’s Shale Oil & Gas Exploration Activities At A Standstill?
more...

Alternative Energy / Fuel
Coadbed Methane Development Progresses Slowly
more...

New Projects
HRRL’s Barmer Project Completed Successfully
more...


SJVN To Set Up 90MW Floating Solar Plant
more...


Indo-Bangla Friendship Pipeline Likely To Be Commissioned In February
more...

Market Watch
Reliance Industries Suspends Natural Gas Auction From KG-D6 Block
more...

Companies
Hoegh LNG
more...


PetronetLNG Books Highest Ever Quarterly Profit
more...


ONGC Signs MoU For Energy Storage Project
more...

Press Release [FREE Access]
Petro Intelligence » Gas Pricing Linked To Global Benchmarks: A Flawed Concept?

By R. Sasankan

Global crude oil prices have been going through the roof once again. Curiously, domestic natural gas prices have also been spiralling upwards without drawing the same kind of obsessive attention or hand-wringing despair. On October 1, prices of domestically-produced natural gas were raised by 40 per cent to an all-time high. This is the third increase in rates since April 2019.

Gas pricing in India has always been a bit of a conundrum. Normally, demand-supply dynamics should influence the price of such a vital product. But India’s energy pundits have been revising the gas prices every six months using a formula based on the weighted average price of four global benchmarks: the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas.

Natural gas is mainly used in India to generate electricity and produce fertilisers. It is also converted into CNG to run automobiles and PNG for cooking fuel. The latest increase in natural gas prices will stoke inflation even though it will not have the same kind of cascading impact that the increase in petrol and diesel prices can conjure.

The war in Ukraine has been pushing up prices of crude oil and natural gas everywhere. There has been a massive increase in the price of gas at all the major trading hubs between July 2021 and August 2022. The Henry Hub price in the US has shot up by 140 per cent during this period. The JKM Marker – which represents the Northeast Asian spot price index for LNG delivered ex-ship to Japan and Korea and is assessed by S&P Global Platts -- registered an increase of almost 257 per cent. The NBP in the UK has increased by 281 per cent. In comparison, prices of CNG and PNG in India went up by only 71 per cent.

 India has been reasonably successful in mitigating the volatility in global crude and gas prices through a series of measures. However, the natural gas price hike announced on October 1 goes against the grain of logic embedded in such a sensible approach.

Pricing issues in the country are invariably decided based on the recommendations of some government-appointed committees, which are usually packed by people who are perceived to be experts in certain areas. The sad truth is that many of these experts sport a halo of authority often tarnished by the grime of intellectual dishonesty. These experts are invariably promoted by different lobbies that work tirelessly to get them appointed into official committees. There is a quid pro quo arrangement. These experts, in turn, take care of the interests of their promoters. This leads to a situation where national interest is badly compromised. There have been a few exceptions where experts have presented dissenting notes on contentious issues. But this is rare. The more troubling aspect of this mutually-beneficial arrangement is that people with little or no competence in a particular area decide critical pricing issues leading to bad outcomes.

It was the Rangarajan committee which recommended that the domestic gas price should be indexed to international benchmarks after scrapping the earlier administered pricing mechanism. The UPA government had almost succeeded in passing the Rangarajan formula a few weeks before the 2014 elections. The Modi government adopted a revised – much improved but still flawed – formula within six months of coming to power.

The government has now appointed a new committee under energy expert Kirit Parikh to review the current pricing formula for domestically-produced gas. The latest price hike announced on October 1 has not been influenced by the views of this committee.

There is a fundamental flaw in the use of a weighted average of international benchmarks to fix the price of natural gas in India. Gas hub prices prevailing worldwide have no relationship to the cost of producing gas in India or anywhere else in the world because, unlike crude oil, there is no global gas market. An almost perfect competitive gas market only exists in North America. The price of gas has risen worldwide only because Russian supplies (mainly via pipelines to Europe) have been severely constrained or reduced due to the war in Ukraine. This cannot become the overwhelming reason to raise the price of domestic gas produced in India, especially from nominated fields. In all fairness though, let us also note that the same formula yielded much lower prices a few years ago for domestic gas in India.

Natural gas is not an internationally traded commodity like crude oil and hence there is no such concept as an international price. This explains why North American gas prices remain in the $7.50- $9.50 per MMBTU range at a time when prices at the European hubs are upwards of $50/MMBTU. Even LNG exported from the same source to different end consumers, before the Ukrainian war, varied by a factor of two or more. Gas prices will return to normal levels overnight if Russian gas supplies are restored.

I do not rule out the possibility of the new committee using the current turmoil in the gas market to justify an unwarranted high price for domestic gas.

The share of natural gas in India’s energy mix is still around 6.2 per cent. Three years ago, Prime Minister Modi announced his government’s intention to revise the energy mix, raising the natural gas component in the mix to 15 per cent by 2030. There is just one hurdle to attaining that goal. The Indian market is extremely price sensitive. The country’s LNG import goes down whenever the spot LNG prices surge. Unless the gas price remains stable and affordable, the target of 15 per cent may not be achieved even by 2040.



To download the latest issue 'Volume 29 Issue 20 - January 25, 2023', click here
Petro Intelligence [FREE Access]
Crank Up The Oil Wells But Don’t Fall For The Hype
more...

India May Explore Swap Deals For Sakhalin-II LNG
more...

Gas Pricing Report: Burden Falls On The Public Sector
more...

The Lost Terminals: Writing On The Wall That No One Seems To See
more...

Foreign Investment
IndianOil’s Aluminium-Air Battery JV Readies For Manufacturing Rollout
more...


Lubcon Lubrication India To Set Up New Unit In Kolar
more...

Overseas Investment
ONGC Interested In Offshore Energy Exploration In Lanka
more...

Gas Scene
The widening CGD Infrastructure
more...


India’s Consistently Increasing Natural Gas Import Dependency: A Total Picture
more...


Sector-wise Consumption of Natural Gas In December 2022
more...


Domestic Natural Gas Scene In December 2022
more...


Natural Gas Prices Plunging?
more...


India’s LNG Import Shrinks In Volume, Price Doubles During April-September 2022
more...


Sectoral Consumption Of Natural Gas
more...


Domestic Natural Gas Sector Presents A Dismal Picture
more...


Natural Gas Price Trends: Global And Domestic
more...


Domestic Natural Gas Scene In October 2022
more...


Natural Gas Price Trends: Global and Domestic
more...


Sectoral Consumption of Natural Gas In September
more...


Domestic Natural Gas Scene in September
more...


Sector-Wise Consumption Of Natural Gas
more...


Domestic Natural Gas Scene In August 2022
more...


MGL Remains A Remarkably Efficient CGD Company
more...


Natural Gas Price Trends: Global And Domestic
more...

Data Section
Monthly Upstream Data
Monthly Downstream Data
Historical database
Data Archives
Special Database
Story Of The Rise Of Indian Refineries’ Gross Refining Margin
more...


India’s Active Rig Count Almost Stagnant in 2022
more...


A Review Of The General Budget for 2023-24, Oil & Gas Sector In The Budget As Perceived by Experts and the media
more...


An Analysis Of the Petroleum Products Consumption Trend
more...


Item-Wise Petroleum Products Consumption In December 2022
more...


Analysis of Crude Oil Processing by Indian Refineries
more...


Import, Export Of Petroleum Products Down In December 2022
more...


India’s Crude Import In December: OPEC Share Down, Russian Share Up
more...


India’s Declining Crude Production, Domestic, Overseas
more...


Customs, Excise Duty, GST Rates In Petroleum Sector: An Update
more...


Weightage of crude oil, natural gas and petroleum products in Wholesale Price Index (WPI)
more...


Profit After Tax Of Companies In Oil & Gas Sector: An Update
more...


Retail Selling Prices Of Petroleum Products In India and Neighbouring Countries
more...


Indian Crude Basket
more...


Specific Energy Consumption in PSU Refineries, An Update
more...


Rising Share of Imported Crude In Crude Oil Processing
more...


Impact Of Ukraine War? GRMs Of PSU Refineries During H1 2022 Highest Since FY 2017-18
more...


Distillate Yield In PSU Refineries: An Update
more...


Analysis Of Trend In Petroleum Products Consumption During FY 2022-23
more...


Continued Power Deficit Promotes Diesel Sale
more...


Petroleum Products: Import Up, Export Down In November
more...


Crude Oil Import In November: Russian Share Up At 20.7%, OPEC Share Sharply Down
more...


Crude Oil Processing: Down In November, But Up In April-November 2022
more...


Impressive Growth In Petroleum Products Consumption In November
more...

Tenders [FREE Access]
Vedanta
more...