Price of domestic natural gas may be hiked soon

Price of domestic natural gas may be hiked soon

In a move that will incentivise natural gas production in India, the government may soon announce announce hiking the prices of natural gas from the existing $3.82 per Million British Thermal unit or mmBTU (to avoid confusion and for sake of clarity, we will call this as per unit).

Producers of natural gas in India especially the deep-sea and ultra deep-sea gas producers including ONGC, Reliance Industries, BP, GSPC have expressed their unhappiness and reservations over the existing price of $3.82 a unit—a price that is not sufficient to cover the expensive production and development costs of deep water gas developers.

While reports suggest that India’s KG basin of Bay of Bengal is flushed with gas reserves, there has not been substantial efforts going into the development of resources due to capping of gas prices to such lower levels. Most producers like ONGC and Reliance have announced discoveries in the country but have not been able to develop them due to in-sufficient price for this scarce natural resource.

Reports suggest that the government is planning to price domestic gas at an average cost of three fuels including naphtha, fuel oil and imported LNG. A final decision in this regard will however be taken by the Union Cabinet.

Newspapers reports quoted Economic Affairs Secretary Shaktikanta Das in an interview to domestic news agency, PTI that as the current rate (of $3.82 a unit) is not enough to incentivise exploration, the government plans to price undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure areas using average of landed price of naphtha, fuel oil and liquefied natural gas (LNG).

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The PTI report said the price of gas using this methodology will come to over USD 6 per mmBtu at prevailing LNG, fuel oil and naphtha rates.

“It (gas price) would be linked to average of three sources of fuel i.e. naphtha, fuel oil and LNG. The average of imported landed cost (of the three) will be the price that those people will get who do exploration and discovery in deep-sea, difficult areas. It won’t be an administered price as it is for others, but it will be a price which will be an average of those three,” Das said in his interview to PTI.

In his Union Budget 2016-17 Speech, Finance Minister Arun Jaitley has also noted that India is blessed with rich natural resources, including oil and gas. However, their discovery and exploitation has been below our potential.

“With near stagnation in domestic production and consequent rapid increase in imports, the “government is considering incentivising gas production from deep-water, ultra deep-water and high-pressure high-temperature areas, which are presently not exploited on account of higher cost and higher risks,” he had said.

“A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom; and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels,” Jaitley said in his speech.

Goldman Sachs, in a recent report, also noted that the current gas price regime is not incentivising domestic capex sufficiently as cost for new deep-water discoveries ranges between US $6-7 per unit.

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