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Despite shortfall in production, domestic gas prices fall on global cues
Gas price in India is determined based on natural gas prices prevailing at international hubs, as per the approved pricing formula. CRISIL Researchbelieves price will remain under pressure at about $2.4-2.9 per MMBtu over FY2018, given subdued oil and gas prices at international hubs. Globalenergy prices have been under pressure since their mid-2014 highs. The primary competing fuel for natural gas, crude oil, saw its price plummet from$99 per barrel (Dated Brent) in 2014 to just $34 per barrel in January 2016. Gas demand from the European market has also been tepid, givenincreasing penetration of solar and wind energy and availability of cheap coal.
In the latest half yearly price revision, domestic gas price for the period from April 2017- September 2017 fell to $2.48 per MMBtu (million metric Britishthermal units) on gross calorific value basis from $2.5/MMBtu in H2 FY2016.
Similarly, spot LNG prices are expected to remain under pressure over the next 2 years as sluggish demand and rising supplies lead to oversupply inglobal markets. We expect prices (delivered ex-ship) to decline to about $6-6.5 per MMBtu in FY2018 from $7.4 per mmbtu in FY2016.
Government initiatives to aid a rebound in domestic gas output
In an attempt to increase the falling domestic gas output, the government has introduced new initiatives to incentivize the operations in the domesticnatural gas sector. The two key initiatives amongst these include Premium price for new gas discoveries in difficult areas and a new hydrocarbonexploration and licensing policy (HELP).
Acknowledging the issue of feasibility of low gas prices in difficult areas, the government has granted permission for a Premium price for new gasdiscoveries in difficult areas such as High Pressure High Temperature, Deepwater and Ultra Deepwater areas. However, to ensure affordability by theend-users, it has also provided for a price ceiling, based on alternate fuels. The introduction of this policy is expected to incentivize the exploration andproduction of gas from these difficult areas, which are expensive than the conventional gas.
Moreover, it has also introduced a new regime (HELP) for oil & gas exploration. A key alteration involves a shift to a revenue sharing model from thecost recovery model applicable currently. It also provides marketing and pricing freedom for natural gas. This policy is expected to expedite the processof gas production by simplification of the terms of the PSC between the producer and the government.