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Hopes waning on India’s gas price hike

Oilfield Technology,

Business Monitor International (BMI) holds that there may be further delays to the confirmation and implementation of a gas price hike in India.

Political sensitivity over the distribution of benefits between the various ministries from higher gas prices may delay the hike beyond the 15 November deadline that has currently been set. BMI also holds that it is increasingly unlikely that a hike will be applied uniformly across all projects.

The gas price rise was initially expected in late October, however the Cabinet Committee on Economic Affairs has announced that the decision will now only be made on 15 November 2014. This means that producers, which were to have enjoyed a doubling in gas prices from US$ 4.20/million BTU to US$ 8.4/million BTU on April 2014, would have lost out on at least seven months of higher revenues from gas sales. Between April and August 214, BMI estimates that firms lost US$ 2.09 billion in total from this postponement.

The Economic Times has reported that the delay is a result of disagreements between various ministries. The Oil Ministry has pushed for higher prices so as to incentivise upstream investment in India, where production has disappointed despite its resource potential. The power and agricultural ministries are opposed to higher prices as this will increase the feedstock costs for these sectors, or increase the finance ministries subsidies towards them. Local governments also hold different views regarding the merit of higher prices. For example, Mumbai and Pune, which are more reliant on gas for cooking and transportation, will be greater hit by higher gas prices than other states.

Repeated delays to a decision on gas prices pose downside risks to gas production. BMI suggests that the longer inter-ministerial discussions are allowed to continue, the less momentum there will be available for gas price changes to take place within the next three months.

Furthermore, even if the government does agree on raising gas prices, BMI now expects that prolonged negotiations between the various ministries will see the oil ministry achieve a smaller victory. Thus, it is now expected that higher gas prices will not be uniformly applied across all gas projects. Different prices will likely be introduced for different project types. This will provide the middle ground for parties arguing for higher prices to incentivise more expensive investment, and parties who maintain that conventional onshore projects in particular do not need such prices to justify production.

In addition, wariness of private interests in India will make it difficult for the government to agree on the exact projects which would be eligible for higher prices. One of the key objections against higher gas prices is that it would benefit Reliance Industries, operator of india’s biggest gas producing field KG-D6, and its chief executive Mukesh Ambani, who is also the richest man in India. According to BMI, the deepwater and technically challenging nature of KG-D6 – which Reliance and partners BP and Niko resources have highlighted as the chief reason for underwhelming production rates – makes Reliance a natural contender for more favourable gas pricing.

The independent producer’s considerable deepwater acreage will also see it as one of the chief beneficiaries of higher gas prices, which increases the political sensitivity of such a move. BMI highlights that not only will it be seen as enriching Ambani’s coffers further, it also appears to come at the expense of the public who will have to incur higher energy prices as a result. Therefore, political sensitivity and wrangling over the distribution of benefits between the various ministries from higher gas prices risks seeing a further delay to its confirmation and implementation beyond 15 November.

Adapted from a report by Emma McAleavey.

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