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Report | December 2013

Gas pricing in India to determine future investments

The government has shown motive to increase the natural gas pricing in India to maintain a balance with the international markets. It has been observed that a cap on natural gas prices has kept many potential investors away from Indian market, and domestic investors are worried about the viability of their projects over here. A number of LNG projects are planned to be commissioned in the next 2-3 years but their fate will depend on how the government treat with this issue. However, with government intention to let Reliance Industries to revise the prices, hopes are building up for other players to build up their tempo for investment. The problem was that the government fixed domestic gas prices at $ 4.2 million metric British thermal units (mmbtu) in 2007, when global LNG prices were around $7-9 per mmbtu. Now the price of LNG in international markets has become almost double than in the year 2007, but domestic prices remain fixed at the same level. Currently, domestic gas prices are about one-third of imported gas. Consequently, upstream players want domestic prices to increase and linkage of domestically produced gas with LNG (or import parity price). The decision on gas pricing is a complex one and would need to balance both supply and demand side concerns. According to KPMG, the incremental domestic production is expected to be derived from deep water exploration, which requires investments and use of technology, thus implying higher cost of production. Hence, to attract investments in the upstream segment and arrest the decline from existing reserves, the government would need to consider increasing domestic prices.
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