IHS: India needs to reform gas prices

Uncertain reform of natural-gas pricing in India, if allowed to move forward, would revive oil and gas investment and help the government balance its accounts, according to a new study by IHS.

Although the government has announced plans to allow gas prices to increase this year to $8.50/MMbtu from $4.20/MMbtu, it didn’t act before national elections held last month. A group led by Reliance Industries Ltd. issued a notice of arbitration when a price increase it expected under an agreement with the government covering the deepwater KG-D6 Block in the Bay of Bengal didn’t take effect on Apr. 1 (OGJ Online, May 12, 2014).

By weakening investment in exploration and accelerating consumption, the IHS study says, India’s policies on gas prices have increased the country’s reliance on external supply and helped make it the world’s fifth largest importer of LNG.

Citing government documents, the study says investment in offshore exploration and production fell to $1.8 billion in 2011-12 from $6 billion in 2007-08. During that period, offshore drilling fell by nearly 60%.

Imported LNG, with a price more than triple the controlled price of domestic production, accounts for 35% Indian supply.

According to IHS modeling:

• If the price remains at $4.20/MMbtu and no reforms are enforced, gas production will stagnate at 3 bcfd.

• If the gas price is allowed to rise to $8.50/MMbtu under the current set of reforms, production would increase by 1.95 bcfd within a decade.

• At hypothetical gas prices of $10.50/MMbtu and $12/MMbtu, “supply would grow significantly,” the study says, possibly reaching 11 bcfd by 2023 in the case assuming the higher price. That level of output would be more than twice what’s projected under the proposed reforms and would result in the need for about 2 bcfd of LNG by 2025, the study said. According to the BP Statistical Review of World Energy, that’s about the rate at which India imported LNG in 2012.

“Higher gas prices would yield additional government revenues, a reduced balance of payments deficit, and improved security of supply,” said Rajiv Biswas, IHS chief economist, Asia Pacific. “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 chain.”

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