The recent hike in the price of natural gas, effective April 1, 2014, has raised hopes in one Union Ministry but led others to protest vehemently.
While the Ministry of Petroleum and Natural Gas believes that the hike will breathe new life into the sector, the Ministry of Power fears that, in combination with the falling rupee, the higher gas price will render gas-powered projects unviable. The Fertiliser Ministry is also against the hike as it would raise production costs and consequently, the subsidy outgo.
Gas prices are fixed by the Government. The new price was announced after the Government decided to adjust the price in line with a formula suggested by the Rangarajan Committee. (The panel was set up in May 2012 to look into the production sharing contract mechanism and other issues.)
Applying the formula, the price of gas will nearly double from the current price of $4.2 per mmBtu (million British thermal units). However, it will still be cheaper than imported gas.
Idle capacity
India has a huge, gas-based installed power capacity lying idle as there is no gas supply (see: Why the K-G fields matter ). Last year, the country produced 118 mmscmd of natural gas (mmscmd stands for million metric standard cubic metres per day). Gas-based power plants needed 86 mmscmd over the year but got only 41 mmscmd, less than half their requirement. With domestic production falling, the only way out is to import gas or leave the plants idle.
Robert Dudley, Group CEO and Executive Director of BP believes the gas price hike will spur oil and gas companies to invest in development of gas fields and produce more. Terming the price a “very wise” move, he adds: “That is how these new fields that we have just discovered will be developed under this new environment.”
While the price hike is expected to spur activity, and consequently, production of gas, it is not possible at this moment to foresee the extent to which production will increase.
Three things, however, could happen: first, production may increase; second, gas imports will rise; and lastly, the Government may allocate more gas to power plants.
The way out
Perhaps, over the long term, the way out is to de-link domestic gas prices from global prices and develop an Indian market for Indian gas.
This is entirely in consonance with the Production Sharing Contracts signed with oil and gas companies and something they are still clamouring for.
Local gas markets have emerged in the US (Henry Hub), the UK (National Balancing Point) and Europe (Title Transfer Facility, in The Netherlands).
A local gas market can be developed for India too. The producers are here, the consumers are here. They just need to work out a mutually acceptable price.