Why India's gas pricing needs urgent reforms

India's natural gas production will stagnate at current levels if pricing reforms are not implemented and it will have to import heavily to meet the demand, a report by US-based consultancy IHS has warned.

IHS said low regulated gas prices have precipitated a supply shortfall in India, but proposed that reforms to the pricing formula could yield higher domestic production and boost India's economy.

"At (current gas price of) $4.2 per million British thermal unit and with no reforms enforced, the production will stagnate at 3 billion cubic feet per day and India will need to import around 9.7 bcf per day LNG to meet demand.

“The unmet demand would imply a significant drag on India’s economy," it said.

If rates are allowed to increase to $8.5, as set out in the reforms initiated by the previous United Progressive Alliance government, an additional output of 1.95 Bcf per day could come in 10 years.

The previous government had approved a new pricing formula that would have almost doubled rates of all domestically produced natural gas from April 1.

However, before a new rate could be unveiled, the general elections were announced and its implementation got deferred.

The new National Democratic Alliance government is examining its implementation.

"The long-term distortion of India's gas pricing regime has brought about a major gas supply shortfall, acting as a brake on economic activity.

“India's gas pricing reforms represent an important policy shift and should stimulate domestic production, soften growth in reliance on expensive LNG and accelerate India's economy," the report said.

The planned increase to the gas prices has a potential to improve India's balance of payments outlook, enhance security of supply and attract investments into the service industry and supply chain, IHS said.

"India's economy is fragile, struggling with low growth and high inflation," said Rajiv Biswas, chief economist, Asia Pacific at IHS.

"Unmet gas demand now represents a considerable drag on economy and the cost of maintaining subsidised, low gas prices has become unsustainable."

According to the IHS study titled 'India Gas Pricing: When Reform Becomes Unavoidable', the nation's prior gas-market

pricing policies have long distorted its 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 consumer.

"Indian government figures for offshore exploration and production showed investments fell from $6 billion in 2007-08 to $1.8 billion in 2011-12.

Meanwhile, the Indian energy firms invested more than triple this value on projects outside of India," IHS report said.

IHS Energy constructed different gas production outlooks under a range of alternative pricing scenarios.

"At the hypothetical $10.50 and $12 per mmBtu outlooks, the supply would grow significantly.

“With price set at $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," it said.

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 said 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," it said.

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 realise positive income and employment effects from the growth of the supply chains."