Low regulated gas prices have precipitated a gas supply shortfall in India, but proposed reforms to the pricing formula could yield higher domestic production and boost India’s economy, according to new IHS study.
According to the IHS study, India’s prior gas-market pricing policies have long distorted India’s gas supply and demand patterns, weakened investment into domestic gas exploration and accelerated inefficient consumption habits. All of these factors have contributed to the country’s reliance on LNG imports, making India the world’s fifth-largest liquefied natural gas (LNG) consumer.
Indian government figures for offshore exploration and production showed investments fell from US$6 billion in 2007-08 to US$1.8 billion in 2011-12. Meanwhile the Indian energy firms invested more than triple this value on projects outside of India. The result has been a decline of nearly 60 percent in Indian offshore drilling activity over the 2007-2013 period, the IHS study says.
According to the report, the newly announced gas pricing regime, which is due to come into effect this year, is expected to roughly double gas prices to US$8.50 per million Btu (MMBtu) – from $4.20 per MMBtu in 2010 – and is to be maintained over the next five-year period.
“Until 2004, India met its own natural gas needs, but now the country’s energy supply relies on expensive LNG imports, priced at more than triple the (APM) Administered Price Mechanism rate, which now accounts for 35 percent of its overall supply,” said Kash Burchett, senior analyst at IHS Energy. “The government has begun to deregulate gas prices, but the extent of the reforms is not yet clear. A higher APM rate could pave the way for increased domestic production, reduce the reliance on expensive LNG imports and help foster local industrial supply chain development without compromising the economy’s competitiveness.”
By implementing the energy reforms and doubling the gas price, the Indian government will not only allow the Indian gas producers to achieve significant gains, but also encourage explorations of more expensive gas fields – especially offshore reserves, the study says.
The two regions that remain especially attractive – namely, the deepwater Cauvery Basin off the southeastern coast, and the deepwater Krishna-Godavari Basin – farther north in the Bay of Bengal, could serve as additional gas supply resources as new discoveries and investments were made since the announcement of the higher gas price. In addition, the study finds that looking further ahead unconventional gas production may also be developed in India.
Even higher gas prices would secure sharper economic recovery
IHS Energy has constructed different gas production outlooks under a range of alternative pricing scenarios. Whilst it is unrealistic to imagine an APM rate beyond $8.50/MMBtu in the near term, it is worth considering higher prices in the range of $10 - $12/MMBtu in the period beyond 2020.
IHS cost modelling analyses suggest:
At US$4.20 per MMBtu and with no reforms enforced, the production will stagnate at 3 billion cubic feet (Bcf) per day and India will need to import around 9.7cf per day LNG to meet demand. The unmet demand would imply a significant drag on India’s economy.
At US$8.50 per MMBtu, as under the current set of reforms, an additional 1.95 Bcf per day could come within a decade.
At the hypothetical US$10.50 and US$12 per MMBtu outlooks, the supply would grow significantly. With price set at US$12 MMBtu, domestic India production would reach as high as 11 Bcf per day by 2023, which is more than double the projected output under the proposed set of reforms, the scenario predicts.
This would consequently reduce the reliance on LNG imports by a substantial decline to around 2 Bcf per day by 2025, securing higher capital flow into India’s economy coming directly from domestic production, the scenario foresees.
The IHS study says that although the new price outlook implies significant additions from the middle of next decade, gas production will not recover overnight, but it could stimulate domestic economic activity and perhaps ease the call on LNG. Consequently, despite the planned increase in India’s gas price and associated growth in domestic output, in the short term, India’s dependence on LNG imports will inevitably rise through the present decade. The majority of new imports will come from new production sources in North America and offshore East Africa.
“Higher gas prices would yield additional government revenues, a reduced balance of payments deficit, and improved security of supply,” Biswas said. “It also would help India develop an internationally competitive oil and gas service industry and realize positive income and employment effects from the growth of the supply chains.”
According to the IHS study, India’s prior gas-market pricing policies have long distorted India’s gas supply and demand patterns, weakened investment into domestic gas exploration and accelerated inefficient consumption habits. All of these factors have contributed to the country’s reliance on LNG imports, making India the world’s fifth-largest liquefied natural gas (LNG) consumer.
Indian government figures for offshore exploration and production showed investments fell from US$6 billion in 2007-08 to US$1.8 billion in 2011-12. Meanwhile the Indian energy firms invested more than triple this value on projects outside of India. The result has been a decline of nearly 60 percent in Indian offshore drilling activity over the 2007-2013 period, the IHS study says.
According to the report, the newly announced gas pricing regime, which is due to come into effect this year, is expected to roughly double gas prices to US$8.50 per million Btu (MMBtu) – from $4.20 per MMBtu in 2010 – and is to be maintained over the next five-year period.
“Until 2004, India met its own natural gas needs, but now the country’s energy supply relies on expensive LNG imports, priced at more than triple the (APM) Administered Price Mechanism rate, which now accounts for 35 percent of its overall supply,” said Kash Burchett, senior analyst at IHS Energy. “The government has begun to deregulate gas prices, but the extent of the reforms is not yet clear. A higher APM rate could pave the way for increased domestic production, reduce the reliance on expensive LNG imports and help foster local industrial supply chain development without compromising the economy’s competitiveness.”
By implementing the energy reforms and doubling the gas price, the Indian government will not only allow the Indian gas producers to achieve significant gains, but also encourage explorations of more expensive gas fields – especially offshore reserves, the study says.
The two regions that remain especially attractive – namely, the deepwater Cauvery Basin off the southeastern coast, and the deepwater Krishna-Godavari Basin – farther north in the Bay of Bengal, could serve as additional gas supply resources as new discoveries and investments were made since the announcement of the higher gas price. In addition, the study finds that looking further ahead unconventional gas production may also be developed in India.
Even higher gas prices would secure sharper economic recovery
IHS Energy has constructed different gas production outlooks under a range of alternative pricing scenarios. Whilst it is unrealistic to imagine an APM rate beyond $8.50/MMBtu in the near term, it is worth considering higher prices in the range of $10 - $12/MMBtu in the period beyond 2020.
IHS cost modelling analyses suggest:
At US$4.20 per MMBtu and with no reforms enforced, the production will stagnate at 3 billion cubic feet (Bcf) per day and India will need to import around 9.7cf per day LNG to meet demand. The unmet demand would imply a significant drag on India’s economy.
At US$8.50 per MMBtu, as under the current set of reforms, an additional 1.95 Bcf per day could come within a decade.
At the hypothetical US$10.50 and US$12 per MMBtu outlooks, the supply would grow significantly. With price set at US$12 MMBtu, domestic India production would reach as high as 11 Bcf per day by 2023, which is more than double the projected output under the proposed set of reforms, the scenario predicts.
This would consequently reduce the reliance on LNG imports by a substantial decline to around 2 Bcf per day by 2025, securing higher capital flow into India’s economy coming directly from domestic production, the scenario foresees.
The IHS study says that although the new price outlook implies significant additions from the middle of next decade, gas production will not recover overnight, but it could stimulate domestic economic activity and perhaps ease the call on LNG. Consequently, despite the planned increase in India’s gas price and associated growth in domestic output, in the short term, India’s dependence on LNG imports will inevitably rise through the present decade. The majority of new imports will come from new production sources in North America and offshore East Africa.
“Higher gas prices would yield additional government revenues, a reduced balance of payments deficit, and improved security of supply,” Biswas said. “It also would help India develop an internationally competitive oil and gas service industry and realize positive income and employment effects from the growth of the supply chains.”
