Union Budget 2022 did not mention of any gas-related schemes or infrastructure — not even the city gas distribution (CGD) network — despite the recent conclusion of the 11th round of CGD bidding.

Yet, state gas utility GAIL (India) announced pre-Budget that it had commenced India’s first-of-its-kind project of mixing hydrogen into the gas system in Indore, Madhya Pradesh. This hydrogen-blended gas — known as grey hydrogen — will be supplied to a joint venture for retailing of compressed natural gas (CNG) to automobiles and piped natural gas (PNG) to households for cooking.

The pilot project is using ‘grey’ hydrogen with a view to subsequently use green hydrogen.

Green hydrogen is the only clean form of hydrogen as it is produced without harmful greenhouse gas emissions by separating hydrogen from water using electrolysis with renewable energy. Grey hydrogen, on the other hand, is produced by separating hydrogen from the fossil fuel gas (which is one part carbon and four parts hydrogen).

The details of GAIL’s proposed pilot have yet to be published, but proponents would need to be looking very closely at the investment risk of such a project due to recent global gas volatility and record high prices, making gas a very expensive resource.

Rising prices

Gas-using States such as Maharashtra, Gujarat and Delhi saw repeated upward revision in CNG and PNG prices last year, especially after the bi-annual October revision of gas well-head prices, which saw prices rise to 62 per cent for regular fields and 69 per cent for difficult fields. For instance, CNG and PNG prices were revised more than five times in 2021 by a gas utility in Mumbai leading to 34 per cent and 31 per cent increases, respectively.

Indian spot LNG imports also increased last year, from $8.21/MMBtu (million metric British thermal unit) in January 2021 to $30.66/MMBtu in December 2021 — an increase of 270 per cent.

The upcoming April 2022 revision in producer gas prices, to be calculated using the volume-weighted average price (VWAP) of four international benchmarks with data from January-December 2021, is expected to be much higher given recent peaks in international gas prices. It is being estimated that domestic gas prices from regular fields will double in April 2022 (from the $2.9/MMBtu increase in October 2021) to $6/MMBtu, and would further increase to $8/MMBtu in October 2022.

This increase in producer gas prices would translate into increased prices for gas consumers in household, commercial and industrial sectors, making gas use extremely unaffordable, and dampening existing demand. Further increases in gas prices would also make the production of grey hydrogen, which needs to use this expensive gas, an infeasible proposition.

The disconnect between government policy and GAIL’s pilot illustrates an uncertainty in India’s gas sector, which has been suffering from extreme price fluctuations having reached record highs and lows over the past two years.

Stranded infrastructure

As IEEFA noted in a recent report, gas price volatility is an abiding issue with the risk of stranded infrastructure assets. It is also however an opportunity for utilities such as GAIL and the gas sector to switch to cleaner, non-fossil fuel alternatives.

Gas price volatility dampens demand, as do high prices. With the onset of Covid-19, LNG demand fell, and prices tumbled. In April 2020, the Japan Korea Marker (JKM), considered a benchmark for Asian LNG spot prices, reached its lowest point at $2/MMBtu. However, once the economic recovery began, gas supply couldn’t keep pace and prices started rising with the JKM peaking at $35/MMBtu on October 5, 2021. In the last few months, the Indian import spot LNG price, on average, has been in the range of $30/MMBtu.

Given the unprecedented and unexpected sharp rises in gas prices last year, there can be little certainty that prices will stabilise at around $19-20/MMBtu in 2022, as predicted at the start of December.

The futures for February indicate prices will remain above $25 till at least March 2023. In October last year, prices were expected to settle at $14-15 by May 2022 — an indication of the increasing unpredictability in gas markets. This itself is way beyond India’s affordability threshold of $10/MMBtu.

Such price volatility can have major implications for demand, capital and infrastructure, especially in price-sensitive emerging economies such as India — raising the operating costs of downstream projects in the industrial, power and CGD sectors, and harming product competitiveness, utilisation rates and returns on investment.

India is planning a massive expansion of LNG import infrastructure to spur gas demand. However, skyrocketing LNG prices and increased attention on the global warming potential of methane (the major component of ‘natural’ gas) will more than likely lead to a major risk of under-utilisation of this infrastructure with billions of dollars’ worth of investment becoming stranded, again demonstrating the policy disconnect.

As IEEFA has previously noted, global gas supply/price volatility will likely continue to increase due to reduceddrilling activity, financial instability in the oil and gas industry, and lower industry investment.

An industry analysis shows that between 2016 and 2020, while Asia LNG spot prices averaged 27.2 per cent lower than Brent-linked prices, the volatility of LNG prices was much higher at 51 per cent compared to the Brent-based contract prices.

Peak gas prices are challenging for producers and consumers and highlights a major problem with relying on gas as a “bridge fuel” to a lower carbon economy. Further, it adversely affects India’s import bill and current account deficit (CAD) — already deeply impacted by the pandemic — and puts the nation’s energy security at risk, making it a matter of urgency for the government to explore cleaner alternatives to gas.

Biogas and biomethane

As consumers contemplate substituting polluting fuels, the focus should be on developing renewable energy alternatives that would not only be more affordable but also help India transition to a low-carbon economy. Biogas and biomethane, options approved by the US Renewable Fuel Standard programme, are equivalent in quality to gas for cooking and transport and industrial use, respectively.

For the government of India, the current market mayhem presents an opportunity to enable cleaner, non-fossil alternatives for gas-dependent sectors such as CGD and industry.

In a nutshell, to strengthen energy security, there is an urgency for investment in alternatives to gas to insulate India from balance of payments risks and from the fuel’s inflationary pressure — and, most importantly, to meet low-carbon goals.

The writer is energy analyst, Institute for Energy Economics and Financial Analysis, India

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