No Significant E&P Investment Expected in Indian Gas Sector in Near Future

The Indian natural gas sector is not expected to see any significant increase in E&P investment in the near future despite revised price mechanisms due to low gas price and lack of clarity on “premium” for deep water and high pressure high temperature fields, according to Crisil Research, India’s leading independent research house.  

Low gas price and no clarity on “premium” will limit E&P investments, particularly in deep water fields, said Rahul Prithiani, Director, Industry & Customised Research, Crisil Research during the 5th Annual Conference on LNG Business in India: Amid Low Oil Prices held on 26-27 August in New Delhi.

The procedure for determining the “premium” has yet to be notified by the government and premium pricing is not applicable for discoveries made till October 2014. 

However, despite expectation of lack of investment, Prithiani said production is set to rise with development of existing discoveries, particularly by Indian state owned energy companies. Domestic natural gas output is expected to rise from 92 mmscmd in 2014-15 (Apr-Mar) to 138 mmscmd in 2019-20. ONGC’s production will rise from 60 mmscmd in 2014-15 to 80 mmscmd in 2019-20.

ONGC’s Daman project (with peak output expectation of 8.5 mmscmd) and KG basin block (approx. 22 mmscmd) are expected to drive production growth. Field Development Program (FDP) for KG D6 satellite fields (10 mmscmd) and D-34 (15 mmscmd) have been approved with investment of $3.8 billion but, Prithiani said, ongoing litigation and low domestic gas prices pose potential downside risk to production.

Output from unconventional sources like coal bed methane (CBM) is expected to be limited by regulatory and land acquisition hurdles, he said.

Indian gas prices to remain muted for most of this decade

With Indian domestic prices now considerably linked to global benchmarks, depressed international crude oil and gas prices are likely to keep local gas price muted.

“There is going to be a sustained period of depressed gas prices,” Prithiani said, adding that low global gas prices are set to bring down domestic gas price to about $4/mmBtu by 2016-17 from current $4.8/mmBtu. However, partial rebound in crude oil price over the longer term will lend support to domestic gas price. From low of $4/mmBtu in 2016-17 price is forecast to rise to $4.5-$5/mmBtu by 2019-20.

Indian gas market which till last October was completely regulated by the government has gradually moved towards a market based one. Till October 2014, multiple gas pricing regimes existed in India namely APM from nominated fields set by government, broadly on cost-plus basis ($4.2 per mmbtu), non-APM from nominated fields fixed by government ($4.2 – 5.25 per mmbtu), pre-NELP which was contractually determined and based on alternate fuel prices ($3.5 – 5.73 per mmbtu) and NELP which was formula based and needed to be approved by the government ($4.2 per mmbtu).

In October 2014, a “New Domestic Natural gas Pricing Guidelines” was notified linking domestic gas price to global gas trading hubs: Henry Hub (US), Alberta (Canada), National Balancing Point (Europe) and Russian domestic gas price. Fields where gas price is contractually determined, such as the Pre-NELP fields (Panna-Mukta-Tapti) were exempt.

According to Prithiani LNG price ((Delivered Ex-Ship, India), both contracted and spot, are likely to decline during the next few years. From $13.7/mmBtu in 2014-15 contracted LNG price is expected to decline to $12.5-$13/mmBtu in 2015-16. In comparison spot LNG price is forecast to see a significant slide from $11.3/mmBtu in 2014-15 to $7.5-$8/mmBtu in 2015-16.

This 60 percent premium over spot price will impact offtake of contracted LNG, Prithiani stated, adding enforceability of “take-or-pay” will remain a key risk for marketers like GAIL.

Falling prices, higher output to boost consumption

Aided by falling price amid higher production, Indian gas consumption is set to grow to 204 mmscmd in 2019-20 from 140 mmscmd in 2014-15, an annual growth of almost 8 percent.

Fuel cost pass-through, new urea investment policy is likely to boost gas demand from fertilisers sector.

Demand from power sector will see a leg up due to rising supply and subsidy for LNG based power.  Demand is forecast to rise from 25 mmscmd in 2014-15 to 36 mmscmd in 2015-16 (when subsidies start kicking in) to 61 mmscmd in 2019-20.

Assured domestic gas supply for compressed natural gas (CNG) and domestic piped natural gas (PNG) will also aid demand growth, Prithiani said.

However, steep fall in price of alternate fuel will limit demand from industrial segments.

“Price of gas will be uncompetitive vis-à-vis coal and that will pose a challenge,” he said.