Like the oil market, the structure of the natural gas market too has seen a change due to the global energy crisis sparked by Russia’s invasion of Ukraine. According to the International Energy Agency (IEA), there is a need for a dialogue between producers and consumers looking to ensure both short- and longer-term security of supply and reduced emissions.

“Tensions in gas markets have eased significantly since the beginning of 2023,” according to the latest edition of the IEA’s annual Global Gas Security Review. Yet the new analysis notes that deeper coordination among market participants is essential, given the momentous shifts in functioning of the gas market.

For India, which is looking to shift towards other sources of energy besides crude oil, the price of imported gas is a challenge. And this is evident from what the head of the Petroleum & Natural Gas Regulatory Board, Anil Jain, said at a recent conference.

According to Jain, “The persistent dichotomy between domestic and imported gas, which is splitting the market, must be dismantled for the sake of a cohesive natural gas industry.”

“I think this dichotomy between domestic gas and imported gas has to go because as long as we keep looking at gas in compartments, it will split the market,” he said. With only 25 MT gas coming through out of a potential 45 MT of free gas, there is an opportunity for the LNG business to integrate with the natural gas industry.

Jain has flagged off what has been ailing this segment for sometime.

India has total gas demand of approximately 160 million standard cubic metre (MMSCM), of which only 50 per cent is produced domestically.

Gas sold under Administered Price Mechanism (APM) constitute about 45 million standard cubic metre a day (MMSCMD), gas from High Pressure High Temperature is about 25 MMSCMD and balance is non-APM gas generally priced around APM. Besides these there is liquefied natural gas (LNG).

The price regime

The country has different pricing regimes for domestic gas and they are not aligned with imported gas which is freely priced. Currently, India depends on locally-produced gas, both conventional and unconventional, as well as LNG shipments.

“Local gas sources have different pricing formulas linked to prices of other gas hubs, competing fuel bases and only to a small extent, to LNG. This means the average gas market pricing in India neither fully reflects imported LNG realities nor domestic gas market fundamentals. This has created transactional difficulties across the gas value chain from suppliers down to consumers,” according to Kenneth Foo, Associate Pricing Director, APAC LNG, S&P Global Commodity Insights.

Re-gasified LNG generally has two prices — long term: which is linked to Brent and Henry Hub and Spot: which is linked to Brent and other components. Within domestic, again major pricing regime (volume wise) is under Administered Price Mechanism and High Pressure High Temperature.

APM is linked to Brent with floor and ceiling and High Pressure High Temperature is freely priced but capped at a formula derived of alternative fuels.

Recently through an order, the Ministry of Petroleum and Natural Gas, has further restricted the High Pressure High Temperature gas in terms of segments to which it should go. This gas, if sold at a constant price (any price either ceiling or otherwise), the segments which will get priority are: City Gas Distribution, Fertiliser, Power and LPG, in that order.

And, if marketers are buying this gas then it cannot be sold with trading margin of more than ₹16/mBtu (million British thermal unit). Therefore, traders have lost interest in buying this gas due to resale trading margin cap of ₹16/mBtu. Further, this gas being produced in Andhra Pradesh, where VAT of 24.5 per cent is applied, does not get sold even when gas prices are lower, due to high tax incidence, according to industry observers.

Priority sectors

Domestic gas pricing is totally misaligned due to tax regime and its priority to certain sectors. And is sometimes costlier than RLNG being sold at LNG terminals in Gujarat and Maharashtra where taxes are levied at 15 per cent and 3 per cent respectively.

With much of the gas supplied being under some form of price cap, only the prices of spot Regasified-LNG are market determined, which is merely 15 per cent of total gas consumption, industry trackers point out adding that “This shrinkage will hamper market development and also will create bottleneck in India’s vision of increasing gas from 6 per cent to 15 per cent.”

Asked if India’s gas market is matured enough, Rajesh K Mediratta MD & CEO of IGX (Indian Gas Exchange), said, “Not yet. There is lot of scope for improvement in gas markets — Uniform taxation is a must, Unbundling of Marketing and Transportation companies, Independent System Operator is a must, Transmission Capacity Access be non-discriminate and neutral and available on short notice like day-ahead and Transmission access and tariff should move to entry-exit mechanism.”

According to Foo, “The market situation in India last year saw local gas prices at a steep discount to international LNG prices, reflecting the fact that India had been outcompeted for LNG cargoes by buyers in Europe, North Asia and South-East Asia.”

India’s LNG imports dropped 19 per cent year-on-year to 19.71 million tonne in 2022. This was also the lowest LNG import level since 2017. India’s LNG imports in the first six months of 2023 was at 10.1 million tonne, even lower than the 10.54 million tonne during the same period last year.

“However, if India is to become a more gas-based country, then LNG imports would need to be increased significantly. Creating an even stronger index link between LNG and domestic gas prices would be desirable. The link to international LNG prices allows for more certainty for importers and more predictable supply for downstream Indian buyers,” Foo felt.

There is a consensus that the current mix of domestic and imported gas (50:50) will tilt in favour of imported gas due to increasing demand. And to cope with the shift the existing challenge needs to be addressed.

Clearly, supply is not a challenge, but the existing price regimes are. The sooner it is corrected the better it is for the gas market to expand and for the country to shift to cleaner fuel.