Gas Market Report 2019 |
4. Prices and market reforms |
India
India’s natural gas market is characterised by regulated prices for both domestic production and for consumption. In recent years, India has taken steps to improve pricing for production and to control the cost of imports, and is now looking to establishing a trading hub.
The Indian government has introduced successive pricing reforms since 2010, leading to an increase in prices under the Administered Pricing Mechanism (APM) first introduced in the 1970s. The reforms aimed to incentivise investment in declining domestic natural gas production capacity. In late 2014 price reforms moved away from the existing cost plus-based APM fixed by the government, to introduce a basket of external price references – the formula includes price indices from the United States (Henry Hub), the United Kingdom (National Balancing Point), Canada (AECO Hub) and Russia (regulated price), weighted by their respective domestic consumption volumes. This basket price index is linked to external market supply and demand dynamics, and does not reflect India’s domestic production costs or cost of imports (mostly oil-indexed for LNG long-term supplies). It thus led to a price decrease until mid-2017 (see Figure 4.9). The rebound in international prices implied four price increases over the past year, first in October 2017 (up 17%), then in April 2018 (up 6%), October 2018 (up 10%) and April 2019 (up 10%).
Consequently the current domestic price is set at USD 3.69/MBtu until 30 September 2019. In spite of the successive increases, this price level is still under the supply costs for both domestic production and LNG imports. According to domestic producers Oil and Natural Gas Corporation (ONGC) and Oil India Limited (which accounted for 83% of India’s total natural gas output in the first half of the financial year 2018/19 [PPAC, 2018]), the price level at the end of 2018 (USD 3.36/MBtu before the 1 April 2019 revision) was still insufficient to recover their average production costs, which stood at USD 3.59/MBtu and USD 3.06/MBtu respectively (The Economic Times, 2018).
Figure 4.9. Evolution of domestic natural gas price and price ceiling for India, 2015–19
USD/MBtu |
10 |
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9 |
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8 |
7
6
5
4
3
2
1
0
Domestic gas price |
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Gas price ceiling (for discoveries in DW, UDW, HPHT) |
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Notes: DW = deep water; UDW = ultra-deep water; HPHT = high pressure and high temperature.
Source: PPAC(2019a), Domestic Natural Gas Prices (database), www.ppac.org.in/content/155_1_GasPrices.aspx.
Domestic supply pricing has evolved to greater flexibility with the introduction of price freedom, yet the resulting consumer price remains below import costs.
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Gas Market Report 2019 |
4. Prices and market reforms |
As part of the Hydrocarbon Exploration Licensing Policy (HELP) regime introduced in 2016 to further incentivise investment in domestic natural gas production, pricing freedom was introduced subject to a ceiling for production from discoveries in deepwater, ultra-deepwater and high-pressure high-temperature fields. This ceiling price is set by the Ministry of Petroleum and Natural Gas and updated twice a year. This ceiling is based on the lowest of: (a) the imported fuel oil price; (b) the weighted average price of substitute fuels (0.3x coal + 0.4x fuel oil + 0.3x naphtha); and (c) the LNG import price. This ceiling price recovered from its low point of late 2016 at a faster pace than the domestic price (see Figure 4.9) with five successive increases, and currently stands at USD 9.32/MBtu until 30 September 2019. In February 2019 the government granted marketing and pricing freedom to all new natural gas discoveries whose field development plan had yet to be approved.
The Petroleum and Natural Gas Regulatory Board (PNGRB), which oversees midstream and downstream natural gas-related policies, issued in April 2018 a tender to hire advisory services to launch a natural gas trading hub “where natural gas can be traded, and supplied through a market-based mechanism instead of multiple formula-driven prices” (PNGRB, 2018a). The expected launch of this natural gas hub had initially been set for the end of 2018; in December 2018 the Minister for Petroleum and Natural Gas reaffirmed the objective to set a trading hub “soon” to allow ease of access to gas suppliers and buyers (The Hindu Business Line, 2018a).
This objective of developing a platform for multiple buyers and sellers, although challenging, is nonetheless achievable if conducted in parallel with other market reforms such as further downstream price deregulation, unbundling of network operation and marketing activities, rationalisation of transport tariffs, or enabling more downstream flexibility currently limited by downstream natural gas allocation mechanisms. The following have been achieved to date:
In August 2018, GAIL (the largest state-owned natural gas processing and distribution company in India) launched an online platform for capacity booking. Under PNGRB guidelines, up to 25% of the total pipeline capacity is to be earmarked for third-party access on a first-come first-served basis and for a period of less than one year.
The following step towards the potential unbundling of GAIL remains on hold; after considering full unbundling in early 2018 on PNGRB’s recommendation, the government later reconsidered it as a legal and accounting separation; the decision is currently understood to be on hold.
LNG terminals are currently not open to third parties. PNGRB issued a draft regulation in 2018 for the setting up and operation of LNG terminals, which stipulates that new terminals would have to offer at all times 20% of their short-term (less than 5 years) uncommitted regasification or a minimum of 0.5 million tonnes per annum (Mtpa) to third parties (PNGRB, 2018b).
However, such a transition could prove challenging owing to the price sensitivity of Indian domestic consumption, as power generation and several industrial sectors – among them fertilisers – have regulated prices and benefit from subsidies. In the case of fertilisers, government subsidy covers about half of the retail price (see Box 4.3).
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Gas Market Report 2019 |
4. Prices and market reforms |
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Box 4.3. Fertiliser pricing and subsidies in India
The fertiliser industry accounted for almost 30% of India’s natural gas consumption in 2018, and was supplied by LNG imports (55%) and domestic production (45%) (PPAC, 2019b). Natural gas is the primary source of feedstock for the production of urea fertiliser and accounts for 70% to 80% of the total production cost. Nutrient-based (NPK for nitrogen, phosphorus and potassium) fertilisers are derived from ammonia, which in India is produced from natural gas or refined oil products.
Fertilisers are subsidised to ensure sufficient and affordable supply for the country’s agricultural sector. Urea is the main component of the fertiliser subsidy budget, accounting for above twothirds of the total envelope over the recent fiscal years (see table). The budgeted fertiliser subsidy amounts to INR 701 billion (Indian rupee, or about USD 10 billion) for fiscal year 2018/19, of which INR 450 billion (USD 6.5 billion) is for urea.
The Indian government reformed its urea subsidy policy in 2015 by introducing natural gas price pooling to have a single reference price for feedstock from different sources of supply – domestic production or LNG imports. The share of (cheaper) domestic gas production in overall supply to the fertiliser industry declined from 75% in 2013 to 45% in 2018, partly due to the gradual shutdown of the KG-D6 offshore field (part of its production being allocated to the fertiliser industry). This caused an increase in the subsidy budget to guarantee a fixed price for urea buyers, although the budget has stabilised in recent years.
Fertiliser subsidy for fiscal years 2016/17 and 2018/19 as per budget documents (INR billion)
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2016/17 |
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2017/18 |
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2017/18 |
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2018/19 |
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actual |
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budget est. |
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revised |
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budget est. |
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Urea subsidy |
|
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475 |
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498 |
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427 |
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450 |
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Payment for indigenous urea |
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||||
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380 |
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370 |
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320 |
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350 |
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Payment for urea subsidy |
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||||
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20 |
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30 |
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50 |
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- |
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Payment for imported urea (net |
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||||
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75 |
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98 |
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57 |
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100 |
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recovery) |
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|||||||||
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Nutrient-based (NPK) subsidy |
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188 |
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202 |
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223 |
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251 |
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Payment for indigenous fertilisers |
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118 |
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123 |
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144 |
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158 |
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Payment for imported fertilisers |
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70 |
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79 |
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79 |
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93 |
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Total |
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663 |
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700 |
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650 |
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701 |
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Source: FAI (2018), Annual Report 2017-2048, https://www.faidelhi.org/general/FAI%20Annual%20Report%202017_18.pdf.
Developing domestic natural gas production would alleviate the subsidy burden – according to the Fertiliser Association of India (FAI), every million cubic metres of imported LNG substituted by domestic production could save INR 8.7 billion (approximately USD 130 million) of subsidy, and switching to full domestic supply could cut the subsidy by INR 230 billion (USD 3.3 billion) per year (The Hindu Business Line, 2018b). The FAI also points out the issue of delays in fixed-cost reimbursement to fertiliser producers, which further adds to the rising cost of supply from imported sources.
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Gas Market Report 2019 |
4. Prices and market reforms |
The Cabinet approved in March 2018 the continuation of the urea subsidy programme initiated in 2017 to fiscal year 2019/20. This decision implies a freeze in urea prices until 2020 (PIB, 2018).
Sources: FAI (2018), Annual Report 2017-2048, https://www.faidelhi.org/general/FAI%20Annual%20Report%202017_18.pdf, PPAC (2019b), Monthly Reports, Natural Gas Production, Availability and Consumption, Ministry of Petroleum and Natural Gas, Government of India, https://ppac.gov.in/content/22_2_Archives.aspx, The Hindu Business Line (2018b), “Replacing imported LNG with domestic gas can save INR 23,000 crore in fertiliser subsidy: FAI”, www.thehindubusinessline.com/economy/replacing- imported-lng-with-domestic-gas-can-save-23000-cr-in-fertiliser-subsidy-fai/article25664574.ece (accessed 19 March 2019).
India is also trying to bridge the pricing gap by renegotiating its long-term LNG supply contracts. Taking advantage of its growing importance as an LNG buyer and the ample market supply, India obtained lower import prices in exchange for greater contracted volumes:
In December 2015, Qatar’s Rasgas and India’s Petronet LNG renegotiated the terms of their 25-year supply contract of 7.5 Mtpa. Petronet LNG obtained a revision of its pricing formula in which the oil reference period was switched from a five-year average of Japanese Crude Cocktail (average price of Japan’s basket of crude oil imports) to a three-month average of Brent prices, resulting in the LNG price responding more quickly to changes in oil prices. As oil prices were falling, LNG prices were adjusted downwards when the new formula was applied. Petronet was also allowed to waive a USD 1.8 billion penalty for taking lower-than- contracted volumes. The parties also signed an agreement for an additional 1 Mtpa for 12 years starting in 2016.
In September 2017, Petronet LNG renegotiated with ExxonMobil its 1.5 Mtpa supply contract sourced from Australia’s Gorgon LNG in a similar way. While the revised deal includes a lower oil indexation coefficient (from 14.5% to 13.9%) and the inclusion of shipping charges by the seller, it was complemented by the inclusion of an additional 1 Mtpa of contracted volume.
In April 2018, GAIL announced that the price of its coming LNG supply from Gazprom (based on a 2012 20-year sales and purchase agreement) had been renegotiated.
Pakistan
Natural gas is Pakistan’s main energy source, accounting for over 40% of total energy consumption, with domestic production being the primary source of supply. All activities relating to the development, exploration, distribution and transmission of natural gas in Pakistan are regulated by the Oil and Gas Regulatory Authority (OGRA). Natural gas transport and distribution networks are owned and operated by state-owned companies, Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Pipelines Limited (SSGPL), and OGRA has issued licences to other operators for the sale and transmission of natural gas. OGRA is also responsible for setting consumer and producer natural gas prices, which are sanctioned by the federal government.
End-user prices are divided by class of user and for some of them, such as residential consumers, by sub-classes according to their monthly consumption volumes.
The price revision of October 2018 led to an unprecedented increase in the natural gas price for some categories, including the largest consumers among residential users. The residential sector, which was previously split into three sub-classes of monthly volumes (up to 100 m3, up to 300 m3 , and above), was further divided into seven sub-classes with more subdivisions for the
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Gas Market Report 2019 |
4. Prices and market reforms |
largest consumers. Whereas previous price revisions were more or less homogeneous (a 6% increase for all in January 2013, and a 4% increase for up to 300 m3 and 13% for over 300 m3 in September 2015), the 2018 revision led to a double-digit price increase for all sub-classes, and up to a 143% increase for users consuming more than 400 m3 per month (Table 4.2).
Table 4.2. Evolution of natural gas prices for residential sector consumers in Pakistan, 2013–18
Prices in PKR per MBtu
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Consumption |
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January 2013 |
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September 2015 |
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September 2018 |
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up to 50 m3/month |
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106.14 (+6%) |
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110 (+4%) |
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121 |
(+10%) |
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up to 100 m3/month |
106.14 (+6%) |
|
110 (+4%) |
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127 |
(+15%) |
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up to 200 m3/month |
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212.28 (+6%) |
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220 (+4%) |
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264 |
(+20%) |
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up to 300 m3/month |
212.28 (+6%) |
|
220 (+4%) |
|
275 |
(+25%) |
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up to 400 m3/month |
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|
530.69 (+6%) |
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|
600 (+13%) |
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780 |
(+30%) |
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up to 500 m3/month |
530.69 (+6%) |
|
600 (+13%) |
|
1460 |
(+143%) |
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over 500 m3/month |
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|
530.69 (+6%) |
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|
600 (+13%) |
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1460 |
(+143%) |
|
Source: OGRA (2019a), Consumer Gas Prices, www.ogra.org.pk/consumer-gas-prices.
Other classes of consumer were also hit by higher-than-usual price increases, with a 57% increase for most power generation users, 40% for compressed natural gas for transport and for most commercial users, and 30% for industry – excluding textiles which remained flat (Figure 4.10). The successive devaluations of the rupee and a falling exchange rate as the market anticipates a bailout from the International Monetary Fund (accepted in late May) tend to counterbalance most of the increase when converting the prices into US dollars – which then further increases the cost of imports in local currency (Figure 4.11).
Figure 4.10. Evolution of natural gas consumer prices in Pakistan, 2015–19
PKR/000 m3 |
USD/MBtu |
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1 600 |
12 |
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1 400 |
10 |
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1 200 |
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8 |
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1 000 |
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800 |
6 |
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600 |
4 |
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400 |
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2 |
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200 |
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0 |
0 |
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Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 |
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 |
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Residential (up to 200 m3/month) |
Residential (over 400 m3/month) |
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Commercial |
Industry |
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Transport |
Fertiliser |
Source: OGRA (2019a), Consumer Gas Prices, www.ogra.org.pk/consumer-gas-prices.
Consumer prices increased substantially in Pakistan at the end of 2018, especially for wholesale and large retail customers.
The government ordered an enquiry in early 2019 on suspicion of inflated gas bills being issued to some 3.5 million consumers following the application of the September 2018 price revision and overestimated gas pressure factors. The government ordered the return of excessive
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Gas Market Report 2019 |
4. Prices and market reforms |
amounts charged and announced it would reconsider the subdivision of domestic consumers introduced in September 2018 (Bhutta, 2019a).
Domestic production operates under a framework of concessions for onshore regions and production-sharing contracts for offshore fields. Well head prices are set and published at field level by OGRA (some denominated in US dollars and some in Pakistani rupees) for a usual effective period of six months.7 According to the July 2018 well head price notification bulletin, prices at field level range from USD 1.35 to 8.50/MBtu, resulting in a weighted average price of USD 2.73/MBtu (Figure 4.11).
LNG imports remain a marginal source of supply, but have increased from 1.5 bcm in 2015 when Pakistan began importing LNG, to almost 10 bcm in 2018. Pakistan sources its LNG imports from different providers, including long-term contracts and short-term procurement – mainly through tenders. The main source of LNG supply comes from a long-term contract signed between Pakistan State Oil (PSO) and Qatargas, using an oil-indexed pricing formula with a 13.37% slope and based on a three-month average of Brent crude oil prices (OGRA, 2019c). The increase in crude oil prices since 2017 has led to higher import prices, which have remained above the highest level of consumer prices (Figure 4.11). Qatar agreed in March 2019 to increase its LNG exports to Pakistan by 200 million cubic feet per day (or the equivalent of 2 bcm/y), in spite of an ongoing investigation by the National Accountability Board into potential irregularity and renegotiation (Bhutta, 2019b).
Figure 4.11. Natural gas supply costs and average consumer price in Pakistan, 2015–19
USD/MBtu
12
10
8
6
4
2
0
Jan-15 |
Apr-15 |
Jul-15 |
Oct-15 |
Jan-16 |
Apr-16 |
Jul-16 |
Oct-16 |
Jan-17 |
Apr-17 |
Jul-17 |
Oct-17 |
Jan-18 |
Apr-18 |
Jul-18 |
Oct-18 |
Jan-19 |
Apr-19 |
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Range of consumer prices |
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Consumer price (weighted average) |
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Domestic production well head price (weighted average) |
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LNG import price (PSO contract) |
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Sources: OGRA (2019a), Consumer Gas Prices, www.ogra.org.pk/consumer-gas-prices; OGRA (2019b), Well Head Gas Prices, www.ogra.org.pk/well-head-gas-prices; OGRA (2019c), Regasified LNG Notified Prices, www.ogra.org.pk/rlng-notified-prices.
Domestic production prices have remained stable, while oil-indexed LNG import contracts have been impacted by oil price recovery and remain above the range of consumer prices.
7 At the time of writing the latest available set of prices dates back to July 2018.
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