Natural gas prices may dip 17% to $3.15 per mmBtu in April

Natural gas prices in India are likely to decline 17 per cent in April to USD 3.15 per unit, further straining economics of developing discoveries in deep sea. As per the new gas pricing formula approved by the NDA-government in October 2014, gas prices are to be determined on a semi-annual basis and calculated based on a volume weighted average of rates in gas surplus nations of the US, Canada and Russia, based on the twelve-month trailing average price with a lag of three months.

Using benchmark prices for the period of January 1, 2015 to December 31, 2015, gas price for the period April 2016 to September 2016 is likely to be about $3.15 per million British thermal unit (mBtu) against $3.82 currently, sources said. On a net-calorific value (CV) basis, the gas price is likely to be $3.50 per mmBtu as compared to $4.24 currently.

Development of numerous existing discoveries in blocks operated by state-owned Oil and Natural Gas Corporation (ONGC) as well as private sector Reliance Industries Ltd (RIL) are dependent on remunerative prices. ONGC Chairman and Managing Director Dinesh K Sarraf last week stated that developing finds in the firm's Krishna Godavari (KG) basin block KG-DWN-98/2 or KG-D5 is economically unviable at current prices.

The company has asked the Government to raise the rates to make developing the explorations economically viable, he had said. Goldman Sachs had in a recent report stated that "Indian domestic natural gas prices that are linked to prices in gas surplus economies remain materially below the costs to develop marginal and deep-water fields and, hence, do not incentivise exploration and production capex." 

This has resulted in Indian producers potentially losing $2 billion annually in value added assuming they can replace imports entirely, it added. "We believe the current gas price regime is not incentivising domestic capex sufficiently as we expect prices under the current formula to decline in 2016-17 while cost for new deep-water discoveries ranges between $6 to $7 per mmBtu," Goldman had said.

The gas price in India, it said, is lower than the $9 per mmBtu in China, $10.5 in the Philippines, $6.5 in Indonesia and $8 per mmBtu in Thailand and Malaysia. Sources said that going by current price trends, the gas price may rise marginally to $3.32 (on gross calorific value or GCV basis) in the second half of fiscal 2016-17.

They may further rise to $3.36 per mmBtu and $3.42 in the first and second half of fiscal 2017-18 and would be around $3.45 in the following fiscal.