Natural gas pricing in India
Current policy and potential impact
Contents
2
Natural gas pricing in India Current policy and potential impact
Current scenario in India’s
natural gas market
Intricacies of natural gas
pricing in India
Potential impact of new
pricing on energy industry
Chapter 1
Current scenario in India’s natural gas market
India’s natural gas consumption far behind the global average1
India’s expanding economy and growing population have led to increased consumption
of primary energy resources such as coal, oil and natural gas in the country. In line
with this, its primary energy consumption grew at a compounded annual growth rate
(CAGR) of 6% to 563.5 million tonnes of oil equivalent (MTOE) in 2012 from 420.1
MTOE in 2007. The share of natural gas in its primary energy mix increased marginally
from 8% in 2008 to 8.7% in 2012. This is fairly low, compared to the global average
of 24%, primarily due to supply-side constraints. Furthermore, in terms of individual
consumption, India’s annual gas consumption of 44 cubic meters (cm) per capita is far
behind the global average of 470 cm per person.
Per capita gas consumption, cubic meter
Figure 1: Low consumption of natural gas in India, 2012
3,000
Canada
2,500
Russia
US
2,000
Singapore
1,500
1,000
-500
Malaysia
Germany
South Korea
Japan
Turkey
France
500
0
0.0%
UK
Australia
China Brazil
India
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Gas share in energy mix, %
Source: BP Statistical Review of World Energy 2013, The World Bank and EY analysis
Ka_faÔ[Yfl_Yk\]Ô[alÇ\]eYf\^gjkmhhdqljYadk3af[j]Ykaf_
reliance on imported LNG
Af\aYÌkfYlmjYd_YkeYjc]lakk]]af_Ykmhhdq\]Õ[al$hjaeYjadq\m]lgdgo\ge]kla[
production and an inadequate transmission and distribution infrastructure. Domestic
_Ykhjg\m[lagfj][]an]\Yka_faÕ[Yflaeh]lmkoal`[gee]f[]e]flg^hjg\m[lagfYl
l`]C?%<.Õ]d\$dg[Yl]\afl`][gmfljqÌkl`]]Ykl[gYkl$af*((1&@go]n]j$l`]Õ]d\Ìk
output has been steadily declining after reaching 60 million standard cubic metres per
day (mmscmd) in 2010, and has hit a trough of 12 mmscmd in 3QFY142. According
to Reliance Industries Limited (RIL), the fall in KG-D6’s production is mainly due to
_]gdg_a[Yd[gehd]palqYf\YfYlmjYd\][daf]afl`]Õ]d\k&L`]\][daf]afegklg^l`]
[gmfljqÌkY_]af_Õ]d\k`Yk^mjl`]j[gehgmf\]\l`]kmhhdq\]Õ[al&
Gfl`]gl`]j`Yf\$l`]\]eYf\^gjfYlmjYd_YkafAf\aY`Ykaf[j]Yk]\ka_faÕ[Yfldq\m]
to the demand from the power and fertilizer sectors, and cumulatively accounted for
more than 61% of gas consumption in FY13. The demand is also driven by its growing
mkY_]afl`][alq_Yk\akljaZmlagf ;?<!k][lgjYf\af\mkljaYdk][lgjk$km[`Ykj]Õfaf_
Natural gas pricing in India Current policy and potential impact
3
and petrochemicals. Rising concerns on carbon emission have also contributed to the
demand for natural gas in the country.3
L`ak`Ykd]\lgAf\aYÌkaf[j]Yk]\\]h]f\]f[]gfaehgjl]\daim]Õ]\fYlmjYd_Yk DF?!&
L`][gmfljqÌkDF?aehgjlk`Yn]af[j]Yk]\^jgeYhhjgpaeYl]dq0eaddagfe]lja[lgfk
eel!af>Q(1lg))eelaf>Q)+$Y[[gmfl]\^gj*0g^l`]lglYdkmhhdq&4 According
to the BP Statistical Review of World Energy 2013, India is the world’s fourth-largest
aehgjl]jg^DF?afl`]ogjd\&
Dac]da`gg\g^Af\aYf_YkeYjc]lj]eYafaf_afkmhhdq\]Ô[al
despite rising production and import of gas
Over the next few years, the shortfall in natural gas production in the country is
expected to continue with its supply trailing demand. Shortage of gas is likely to reach
its peak in FY15, with around 37% of the demand being unmet.5@go]n]j$^jge>Q).
gfoYj\k$l`]\]Õ[aleYq\][j]Yk]$hjaeYjadq\m]lgl`]hdYff]\hjg\m[lagfg^hjanYl]'
bgafln]flmj][gehYfa]kYf\af[j]Yk]\DF?aehgjl[YhY[alq&Hgo]jYf\^]jladar]jkYj]
expected to remain the anchor segments that consume natural gas and are likely to
account for around 68% of the total demand for it in FY17. Furthermore, deregulated
pricing of petroleum products and an increasing focus on addressing environmental
concerns are expected to drive the demand for natural gas from industrial users,
j]ka\]flaYdmk]jkl`jgm_`hah]\fYlmjYd_Yk HF?!$Yf\afl`]ljYfkhgjlYlagfk]_e]fl
l`jgm_`l`]\]eYf\^gj[gehj]kk]\fYlmjYd_Yk ;F?!&@go]n]j$l`ak\]eYf\ak`a_`dq
price-sensitive and will depend on the price affordability of end users, especially in the
power and fertilizer sectors.6
Figure 2: Future natural gas demand-supply scenario (mmscmd)
135
87 149 371
FY14
148
140
87 170 405
129 177 446
FY15
FY16
LNG imports
114
150 209 473
Domestic
production
Natural gas
demand
DeÕcit
FY17
Source: Ministry of Petroleum and Natural Gas
L`]lglYdkmhhdqg^fYlmjYd_Ykak]ph][l]\lgj]Y[`lg+-1eek[e\af>Q)/$Y;9?J
of 15% from FY14 in India. Most of this incremental supply is expected to be met
ZqDF?aehgjlk$kaf[]l`]_jgol`af\ge]kla[kmhhdqoadd^Yadlgc]]hhY[]oal`l`]
Yfla[ahYl]\jak]af\]eYf\&L`][gmfljqÌkhgl]flaYdlgaehgjlDF?ak]ph][l]\lg
increase to 150 mmscmd in FY17, contributing around 42% of the total supply.
Domestic production is expected to increase at a CAGR of around 12%.7 This is likely
to come from new discoveries which are currently under development, expectation
of partial recovery in the output from KG-D6 and increased production from
unconventional sources, particularly coal bed methane.
4
Natural gas pricing in India Current policy and potential impact
Chapter 2
Intricacies of natural gas pricing in India
Hj]nYadaf_fYlmjYd_Ykhja[af_j]_ae]afl`][gmfljq
complex and heterogeneous
There are multiple natural gas pricing regimes in India. These can be divided into the
following:

Administered Pricing Mechanism (APM)

Fgf%9HE
APM gas pricing:FYlmjYd_Ykhjg\m[]\^jgel`]]paklaf_Õ]d\kg^l`]fgeafYl]\
Zdg[ckg^Af\aYfklYl]%gof]\[gehYfa]k$GADAf\aYDl\& GAD!Yf\GF?;$[Yl]jklg
fertilizer and power plants, court-mandated customers and those requiring less than
50 thousand standard cubic metres per day (mscmpd) at APM rates. The price of APM
gas has been set by the Government on a cost-plus basis and is US$4.2 per mmbtu in
Af\aY MK*&-*h]jeeZlmafl`]Fgjl`]Ykl!&L`]hja[]afl`]Fgjl`]Yklak.(g^l`]
APM price elsewhere in the country (the balance 40% is paid by the Government to
fYlagfYdgad[gehYfa]kgjFG;kYkkmZka\a]k!&8
India’s move toward a market-based pricing regime: In June 2013, the Cabinet
Committee on Economic Affairs (CCEA) approved a market-based pricing formula
for produced natural gas produced in India. The revised prices are based on
recommendations made by the Rangarajan Committee. The pricing formula, valid for
l`]f]plÕn]q]Yjk$h]_kl`]ZYk]hja[]g^fYlmjYd_YkYlYjgmf\MK0&,h]jeeZlm$
up from US$4.2 per mmbtu currently. The upward revision in prices is based on the
o]a_`l]\Yn]jY_]g^l`]f]lZY[chja[]Yll`]o]dd`]Y\g^[gmflja]k]phgjlaf_DF?lg
Af\aYYf\_Ykhja[]kafl`]ljY\af_`mZkg^Fgjl`9e]ja[Y$=mjgh]Yf\BYhYf&L`]k]
are calculated on a trailing 12-month basis. Prices will be revised every quarter.
Non-APM gas pricing: Fgf%9HE_Ykak\ana\]\aflglog[Yl]_gja]kÈ a!aehgjl]\DF?$
for which prices are determined by the market, and (ii) domestically produced gas from
l`]F]o=phdgjYlagfDa[]fkaf_Hgda[q F=DH!Yf\hj]%F=DHÕ]d\k&

Pre-NELP PSC pricing: This is applicable for gas produced from in Panna-Mukta,
LYhlaYf\JYnnYÕ]d\k&?Ykhja[]kYj]\]l]jeaf]\gfl`]ZYkakg^l`]^gjemdY
kh][aÕ]\afl`]hjg\m[lagf%k`Yjaf_[gfljY[l HK;!&9ddl`]_Ykhjg\m[]\akkgd\lg
?9AD&;mjj]fldq$l`]hj]%F=DHhja[af_akZ]lo]]fMK+&-Yf\MK-&/h]jeeZlm&

NELP gas pricing:L`akYhhda]klg_YkÕ]d\kYoYj\]\mf\]jF=DHjgmf\k&L`]
price of gas is determined on the basis of arm’s length prices (market prices),
subject to the Government’s approval, and is controlled by PSC terms. This pricing
regime was valid until March 2014. After this, a new pricing mechanism has come
into force, based on the Ranagrajan Committee’s recommendations. Currently,
F=DH_Ykakhja[]\YlZ]lo]]fMK,&*Yf\MK,&/h]jeeZlm&
Price of imported gas (LNG): L`]hja[]g^dgf_%l]jeDF?aehgjl]\^jgeIYlYj`Yk
been linked to Japanese Custom Cleared (JCC) prices and varies on a monthly basis for
H]ljgf]lDF?&@go]n]j$Af\aYÌk\]h]f\]f[]gf]ph]fkan]khglDF?lge]]ll`]Zmdcg^
its demand sees limited growth from this source. According to industry estimates, the
aehgjl]\_Yk^jgedgf_%l]jeDF?[gfljY[lk[gklkYjgmf\MK)+h]jeeZlm$o`ad]l`]
spot price was at around US$18 per mmbtu in January 20141.
Natural gas pricing in India Current policy and potential impact
5
Chapter 3
Potential impact of new pricing on
energy industry
Overall, the new gas pricing policy augurs well for India’s natural gas market. It is
expected to increase domestic production by encouraging upstream investment.
This will improve India’s energy security and increase availability of gas for its key
gas-consuming industries.
So far, the gas market has been adversely affected by the Government’s current
gas-pricing policy and investment in the upstream sector declined to US$1.8 billion
af>Q)*^jgeMK.&+Zaddagfaf>Q(1&L`]f]ohgda[q$o`a[``YkZ]]fhmlgf`gd\\m]
to the on-going General Elections in the country, is expected to increase certainty and
transparency in pricing of natural gas in India.
Upstream sector
The increase in natural gas prices is expected to encourage investment in the upstream
segment and boost production. It will also improve the commercial viability of
eYj_afYd$\]]h%oYl]jYf\^jgfla]jÕ]d\k$o`a[`j]imaj][mllaf_%]\_]l][`fgdg_qYf\
af[j]Yk]\[YhalYdkh]f\af_&9[[gj\af_lgA@K;=J9Ìk]klaeYl]k$Af\aYÌkj][gn]jYZd]_Yk
j]k]jn]k[gmd\af[j]Yk]Zq--ljaddagf[mZa[^]]l l[^!lg1)l[^Yl_Ykhja[]kg^MK)(Ç
US$12 per mmbtu due to the factors mentioned above.10
Af[j]Yk]\\ge]kla[hjg\m[lagf\m]lgl`]]f`Yf[]\[gee]j[aYdnaYZadalqg^_YkÕ]d\k
ak]ph][l]\lg\][j]Yk]l`]hj]nYd]fl_Ykkmhhdq\]Õ[alafAf\aY&Al[gmd\j]\m[]l`]
[gmfljqÌkDF?aehgjlZadd&11 According to Morgan Stanley, gas prices of more than
MK0h]jeeZlm[gmd\j]kmdlafaf[j]e]flYdhjg\m[lagfg^f]Yjdq1-eek[e\gn]j*(
q]Yjk&L`akogmd\`]dhlgj]\m[]Af\aYÌkDF?aehgjl[gklkZqYjgmf\MK).Zaddagf&12
The proposed hike in gas prices will help to boost the revenues of indigenous gas
hjg\m[]jk&;mjj]fldq$GF?;$GADYf\JADY[[gmfl^gj0-g^l`]lglYdgmlhmlg^
domestic gas. According to Moody’s estimates, the proposed increase in gas prices
oaddYm_e]flGF?;Ìkj]n]fm]ZqMK)&-ÇMK*ZaddagfYf\JADÌkj]n]fm]ZqMK+((Ç
US$500 million in FY15.13 Furthermore, the rise in gas prices will augment the
?gn]jfe]flÌkj]n]fm]afl`]^gjeg^af[j]Yk]\lYp]k$jgqYdlq$hjgÕlkYf\\ana\]f\k&
Increased production of gas will help to alleviate the existing supply crunch, and
reduce the country’s reliance on high-priced LNG. However, price-sensitive sectors
km[`Ykhgo]jYf\^]jladar]jkeYqÕf\al\a^Õ[mdllgYZkgjZl`ak`ac]&L`]j]^gj]$
there is a need for the Government’s policy to effectively address the concerns of
the consuming sector.
6
Natural gas pricing in India Current policy and potential impact
Power sector
The power sector is the largest consumer of natural gas in India. Gas-powered power
plants are plagued by high generation costs and a low average plant load factor (PLF).
Currently, around 6,000 MW of commissioned and 1,000 MW of un-commissioned
YlYfY\nYf[]\klY_]g^[gfkljm[lagf'[geeakkagfaf_!_Yk%ZYk]\hgo]jhdYflkYj]
non-functional due to unavailability of gas. While the new pricing regime is expected
to increase domestic gas supply, which can be used to bring these power plants on
stream, the demand for natural gas for gas-based power generation remains highly
price-sensitive. Power plants are currently being supplied APM gas at US$4.2 per
eeZlmYlYnYjaYZd][gklg^AFJ*&)h]jmfal&9lYHD>g^-($l`akljYfkdYl]kaflgY
_]f]jYlagf[gklg^AFJ,&0h]jmfal^gjf]o[geeakkagf]\hdYflkgof]\ZqhjanYl]
players. The increase in gas prices to US$8.4 per mmbtu is expected to result in a rise
afalknYjaYZd][gklg^AFJ*h]jmfalYf\af[j]Yk]l`]lglYd[gkllgAFJ.&/h]jmfal&L`ak
oaddgfdqeYc]alY^^gj\YZd]^gjh]YcdgY\hmjhgk]k&>mjl`]jegj]$aloaddZ]\a^Õ[mdl^gj
the companies to switch from natural gas to coal due to high conversion costs, a longer
gestation period, their reliance on imported coal and environmental constraints14.
Fertilizer sector
In the case of the fertilizer sector, another major consumer of gas, increased gas prices
would result in a rise in feedstock costs and working capital requirements.
Natural gas pricing in India Current policy and potential impact
7
F]n]jl`]d]kk$Yfqjak]af\ge]kla[_Ykhjg\m[lagfoaddZ]Yhgkalan]\]n]dghe]flaf
the fertilizer industry, since it enjoys a top priority position for allocation of gas.15 In
Y\\alagf$l`akogmd\j]\m[]l`]af\mkljqÌk\]h]f\]f[]gf`a_`%hja[]\DF? .
According to a report submitted by the Government’s Parliamentary Standing
;geeall]]gf>afYf[]$hjg\m[lagf[gklkogmd\af[j]Yk]ZqAFJ)$+0,h]jlgff]oal`
every rise of US$1 per mmbtu in gas prices. Consequently, this would lead to an
increase in the Government’s subsidy burden. An increase in gas prices to around 8.4
h]jeeZlmoaddaf[j]Yk]l`]?gn]jfe]flÌkkmZka\qZmj\]fZqAFJ)*(Zaddagf MK*
billion). This subsidy burden can be offset by additional revenues received by the
?gn]jfe]fl^jgeaf[j]Yk]\jgqYdlq$hjgÕl%k`Yjaf_Yf\lYp[gdd][lagfk^jgemhklj]Ye
operations expected in development of new gas resources.
;alq_Yk\akljaZmlagfk][lgj
The CGD sector is another key consumer and has witnessed rapid growth in recent
years. The sector will continue to create a demand due to the addition of gas networks
aff]o[ala]k$l`]hja[]Y\nYflY_]g^;F?gn]jYmlg^m]dkYf\af[j]Yk]\mk]g^HF?af
l`]\ge]kla[$af\mkljaYdYf\[gee]j[aYdk][lgjk&@go]n]j$l`]f]o_Ykhja[af_hgda[q
will increase sourcing costs for CGD companies with a high APM gas allocation. CGD
companies are expected to witness a decline in their earnings due to an increase in
their input costs. These companies are unlikely to pass on the increase in gas prices to
industrial and domestic consumers due to their limited headroom with alternative fuels
\ge]kla[DH?Yf\^mjfY[]gad!&L`]f]o_Ykhja[af_oaddfgl`Yn]Yka_faÕ[YflaehY[l
gfgh]jYlagfkafj]_agfkoal`Yhj]\geafYfleapg^DF?afl`]ajkgmj[af_g^_Yk$]&_&$af
Af\aYÌko]kl]jfj]_agf&L`akakZ][Ymk];F?hja[]kYj]Ydj]Y\q`a_`afkm[`_]g_jYh`a]k&
@go]n]j$l`]l`j]Ylg^\]hj][aYlagfg^[mjj]f[qoadd[gflafm]lgZ]Y[Ymk]g^[gf[]jf$
since the cost of sourcing is dollar-dominated16. Overall, increased availability of
\ge]kla[_Yk^jgef]ohjgb][lkakdac]dqlgaf[j]Yk]afn]klgjkÌ[gfÕ\]f[]afl`]k][lgj&
Petrochemicals and other consuming sectors
The petrochemicals sector uses natural gas to extract ethane and produce
polyethylene, propane and butane for production of LPG. Input costs account for
around 80% of manufacturing costs. Increased gas prices would mean reduced
hjgÕlYZadalq^gjh]ljg[`]ea[Yd[gehYfa]k&L`akogmd\Ydkg`gd\ljm]^gjgl`]jaf\mklja]k
such as ceramics and glass, since their input costs are also likely to go up with the price
revision. On the other hand, companies that have replaced expensive fuels such as
fYh`l`YYf\\a]k]doal`fYlmjYd_YkoaddklYf\lgZ]f]Õl^jgel`akj]nakagf$kaf[]aloadd
j]eYaf[geh]lalan]Ylj]nak]\hja[]k&J]Õfaf_ogmd\j]eYafmfY^^][l]\^jgel`]`ac]af
gas prices, since the sector meets most of its demand from imported gas or naphtha.
8
Natural gas pricing in India Current policy and potential impact
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Yffgmf[]e]fl$Ê:mkaf]kkDaf]$`llh2''ooo&l`]`af\mZmkaf]kkdaf]&[ge'][gfgeq'mf[]jlYaflq%\g_k%f]o%_Yk%
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15. É9DDG;9LAGF9F<HJA;AF?G>?9K$ÊEafakljqg^H]ljgd]meYf\FYlmjYd_Yk$`llh2'').,&)((&,/&)+,'
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Natural gas pricing in India Current policy and potential impact
9
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Natural gas pricing in India Current policy and potential impact
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EY contacts:
Dilip Khanna
Partner, Transaction Advisory Services
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Raju Lal
Partner, Risk Advisory Services
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PHD Chamber contacts:
Hydrocarbon Committee,
PHD Chamber of Commerce & Industry
Rajeev Mathur
Chairman
Dilip Khanna & S. K. Jain
Co-Chairman
Dr. Ranjeet Mehta
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ranjeetmehta@phdcci.in
Gurpreet Kaur
Joint Secretary
gurpreet@phdcci.in
Mahima Tyagi
Assistant Secretary
mahima@phdcci.in
Khushboo Khanna
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khushboo@phdcci.in
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Web: www.phdcci.in
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