The government on Thursday raised the prices of domestic natural gas by more than 110 per cent to $6.1 per mBtu for the first half of FY23, beginning April, compared to the October 2021-March 2022 period.

The gas price ceiling for extracting the key commodity from challenging fields has also been revised upwards by 62 per cent to $9.92 per mBtu. Prices have been raised largely in line with the uptick in international prices.

The Ministry of Petroleum and Natural Gas’ (MoPNG) petroleum planning and analysis cell (PPAC) said the prices of domestic natural gas for the period — April 1 to September 30, 2022 — is $6.10 per mBtu (million British thermal units) on a gross calorific value (GCV) basis.

Similarly, for gas produced from discoveries from deepwater, ultra deepwater and high pressure-high temperature fields, the gas price ceiling for the said period is $9.92 per mBtu on GCV.

India meets half of its natural gas requirement through domestic production, while the other half is imported as liquified natural gas (LNG).

Highest price

This is the highest price for procuring natural gas in the country since the government introduced the new domestic gas pricing guidelines in November 2014. Prior to this, the highest gas price was recorded for the November 2014-March 2015 period at $5.05 per mBtu.

The highest ceiling price for gas from challenging fields was recorded for the April-September 2019 period at $9.32 per mBtu.

Impact on sectors

Prashant Vasisht, ICRA Co-Head (Corporate Ratings), said, “The domestic gas price increase was driven by the significant run up in the prices of gas at global hubs. This provides relief to Indian upstream producers as at earlier prices, gas production was a loss-making proposition for most fields for them.”

Although high natural gas prices will provide a boost in the earnings of producers like State-run ONGC and Oil India as well as for Reliance Industries, it could further stoke inflation as the country’s annual retail inflation exceeded 6 per cent for the second consecutive month in February this year.

Besides, sectors like fertilisers and the city gas distribution (CBD), who are the major users of the commodity, are also expected to be impacted. The CGD companies will have to pass on the higher price burden to the end consumer, which includes households using piped natural gas (PNG) and vehicles using compressed natural gas (CNG).

Crisil, in a report on Tuesday, said, “Healthy growth in downstream sectors, particularly CGD and fertilisers ― together accounting for almost half of domestic gas consumption ― will drive growth in domestic gas demand next fiscal, despite the high prices. Demand has already reached the pre-pandemic level this fiscal.”

Demand from the CGD segment will be driven by increasing CNG and PNG penetration. CNG stations are expected to increase to around 5,000 next fiscal year from about 3,700 at present, and domestic PNG connections to 1 crore from 85 lakh as of November 2021, the ratings agency added.

Demand from the fertiliser sector, already largely insulated because of the government subsidy to ensure cost pass-through for manufacturers, will be further supported by capacity ramp-up and conversion of some existing capacity from naphtha to natural gas as a feedstock. Other downstream sectors such as refining and petrochemicals will also exhibit a healthy increase in demand after muted growth this fiscal, Crisil said.

Gas price revision mechanism

Domestic natural gas prices are revised on a bi-annual basis — April-September and October-March — through the administered pricing mechanism (APM), which is based on gas prices in the international markets of the US, Canada and Russia (Henry Hub, Alberta Gas Reference, UK’s NBP and Russia Gas). The MoPNG calculates average international gas prices for the preceding year and is further calculated with a lag of one quarter.

High international prices

According to Crisil, the global spot prices of natural gas have been on a rally since August 2020, after touching an all-time low of $2 per mBtu in April that year. The gas market has tightened since then, due to a combination of robust growth in demand as economies recover from the lockdowns, extreme weather episodes that have increased gas consumption, and tighter-than-expected supply as a series of outages in the US hampered gas production and export capacity.

The constraints, coupled with an unusually cold winter in Europe, pushed prices to a decadal high of over $30 per mBtu in the fourth quarter of 2021, it added.

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