The natural gas pricing reforms initiated by the government will help bring to production at least 12 Trillion cubic feet or nearly four KG-D6—sized gas fields, Bank of America Merrill Lynch said in a report.
The government on June 27 approved pricing of domestic gas at an average cost of imported LNG into India and global gas hub prices from April 1, 2014 which would double the rate of $4.2 per million British thermal unit.
This “new policy will support several new developments to progress through and beyond their final investment decisions,” it said in a report titled “Gas price reforms to unlock Indian gas reserves“.
The new policy will help boost gas supply, increase government revenues and promote much-needed exploration activity.
With current domestic production declining, no external gas pipelines in place and LNG imports priced at more than two-and-half times of the regulated gas price, the country is struggling to meet domestic gas demand.
“The new policy should support several new developments including about 12 Tcf of discovered but currently undeveloped gas (not commercial under the old pricing regime),” it said, adding, “this would help boost gas production, curb expensive imports, promote exploration and increase government revenues.”
“There are 20 Tcf of discovered conventional gas reserves in India which are currently undeveloped, primarily due to low gas price. Wood Mackenzie estimates under the new pricing formula, 12 Tcf of discovered but current undeveloped gas will become commercial, including a number of onshore, shallow water and deepwater projects,” the report said.
It said the formula approved has no caps but Finance Minister P Chidambaram had indicated that if gas price increased to intolerable levels, the government could intervene.
“Thus, gas prices are likely to be capped at $8.5—9 per mmBtu in our view,” the report said.
Under the pricing formula approved, the price of liquefied natural gas (LNG) imports by India under long—term contracts would have 50 per cent weight. The weight for US Henry Hub will be at 22 per cent, UK’s NBP price at 26 per cent and for well head price of Japan’s LNG imports at 3 per cent.
Gas price would be revised quarterly with a lag of one quarter. Thus, gas price under the new regime in April—June 2014 would be based on underlying gas prices in calendar 2013.