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Govt plan to raise gas supply may run out of gas

The Union cabinet approved a new formula for gas pricing - to come into force from April 1 - which, it believes, will incentivise gas production in the newer gas fields of the country. Such fields currently find exploration unviable given the existing gas price which is linked to oil prices for subsequent five years.

twitter-logo Anilesh S Mahajan        Last Updated: January 15, 2014  | 21:55 IST
Govt plan to raise gas supply may run out of gasGovt plan to raise gas supply may run out of gas

India's plan to raise gas availability in the country may well run out of gas. Earlier the Union cabinet approved a new formula for gas pricing - to come into force from April 1 - which, it believes, will incentivise gas production in the newer gas fields of the country. Such fields currently find exploration unviable given the existing gas price which is linked to oil prices for subsequent five years.

The formula, devised by a committee headed by C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Committee, links domestic gas prices to the gas price at international gas hubs . But the new price of gas based on this formula, which is yet to be announced, could well be so high that it will find few takers in the country. According to calculations by global brokerage house, Nomura, the new price could be $8.7 per mmbtu.

In FY 2012/13, India produced an average of 106 mmscmd (million metric standard cubic metres per day).

It currently imports about 25 per cent of its gas requirements. Depending too much on imported gas is not a good sign, notes Deniel Yargin, Pulitzer winning author and vice-president of energy research company iHS, and the oil ministry agrees with him.

India's storage capacity for imported gas is currently 15 MTPA (million tonnes per annum). It is expected to add another 30 MTPA by 2017.

Experts believe the country also needs to rework its priorities in gas consumption. The last gas utilization policy came out in 2008, when domestic production looked rosy, with Reliance Industries' KG-D6 was expected to increase gas projected manifold. But that did not happen. Production at the KG D6 oil and gas fields has dropped drastically.

The bulk of the gas produced domestically is consumed by the fertilizer sector. The fertilizer sector gets highest priority for the domestic allocation of gas, followed by power, compressed natural gas for domestic and industrial use and finally petrochemicals and refineries. In FY2013/14, the fertilizer sector is expected to consume roughly 65 mmcmd of gas. Moily believes that the additional revenues could be used to subsidise the power and fertilizer sectors. But this cannot happen overnight.

Girish Shirodkar, managing partner at the global risk consultancy, Strategic Decisions Group's india chapter, feels that it is high time to rework the gas utilization policy. "A preferred strategy for an Indian company would be to acquire stakes or build plants in countries where gas is cheaper," he says, "We already have companies such as IFFCO forming a JV in Oman, or Indian companies looking at Iran as an option. Bringing in gas and then making fertilizer is not a great idea in the current scenario."

Already, for power generation, the price of gas is way ahead of that of coal. But even as transportation fuel or for other industrial needs, it may well become too expensive once the new pricing formula comes into operation. Rough calculations show that for power generated using gas, an increase of one US dollar per mmbtu (million metric British thermal unit) in the price of gas will raise the cost of generation by 47 paise per unit.

Imported gas is available at $12-$15 per mmbtu in the spot market. Using this puts the cost of generation at Rs 7 a unit, which is much higher than the cost of generation at a thermal power plant running on imported coal, which is roughly at Rs 3-4 per unit.

"We have enough capacity to run on gas. It is an accepted fact that generation of power from domestic gas is an unviable option. It is just peaking power or stop gap arrangements that should be filled with these units," says an official from oil ministry.

The other casualty could be transportation fuel, or CNG. Today, Indraprastha Gas Limited uses roughly three fourths of gas coming from domestic gas allocations, whereas its Mumbai counterpart, Mahanagar Gas gets all its gas from the government allocations. Presently local gas is available from $4 to $6.4 per mmbtu. But with the new formula it would be much higher.

It is estimated that for every US dollar increase per mmbtu in the gas price CNG prices will rise by roughly three rupee per kg (with only domestic gas allocations). "Consumers can expect correction of at least Rs 6 in Mumbai," and roughly Rs 4 in Delhi," says an official. If we go by the current corrections of diesel prices of 50 paise per litre every month, it would be corrected only by Rs 1.5 by then. "The government has to clearly state whether they want to replace these fuels with gas, then they would have to tax these fuels accordingly," Shirodkar of SDG says.

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