The Practical Insight to
Gas Pricing in India
LNG is fast gaining prominence within the Asian Oil and Gas Industry. With the exponential
growth of the LNG market coinciding with the economic boom in India, the LNG scene has
never been as important as it is now in the South Asian country. This article presents some of
the issues pertaining to the pricing of gas in India.
U
ntil the last decade,
natural gas was viewed
as an “unattractive fuel”
compared to oil. The cost
of producing gas was greater
than its intrinsic value; so many
oil producers simply treated
natural gas as a spin-off and flared
it. Today natural gas has emerged
as the “Cinderella fuel” of the
world fuel basket and is pertinent
to India as well. To sustain India’s
robust growth, policy makers are
considering increasing natural
gas contribution from current 9
percent to 20 percent to the energy
mix by 2025(“Hydrocarbon Vision
2025” document, India). At present
natural gas is preferentially
allocated to core sectors under
a fixed price regime called
Administrated Pricing Mechanism
R (APM). The Introduction of New
Exploration Licensing Policy
E (NELP) allowed larger private
participation in E&P activities with
P prices as a function of market
O forces. In effect to this the
Government has approved the
R Reliance Industries’ Krishna-
Godavari (KG) basin gas price
T formula with minor modifications.
LNG India 18 HYDROCARBON ASIA, SEPT/OCT 2007
Since India is set to add
substantial gas supply by mid 2008
and larger portion of this is
expected to be consumed by the
key sectors, with new gas price
the affordability of these sectors
has become a contentious issue.
Going Big
The gas consumption in India
has come long way from 35
MMSCMD in 1990 to 109
MMSCMD in 2006. In the present
scenario India’s domestic gas
production of 87 MMSCMD and
LNG imports of 22 MMSCMD is
not sufficient to meet the demand.
As per “Hydrocarbon Vision 2025”
natural gas demand is estimated
to be around 391 MMSCMD by
2025, rising from 231 MMSCMD
in 2007. India had 1075 BCM
(billion cubic meters) of
recoverable natural gas reserve at
the end of year 2006.
At present, almost half of the
gas is being sold under APM; this
share is likely to fall with declining
production from existing fields
and the addition of new gas
supplies. Core sectors such as
power and fertilizer consume
around 70 percent of the present
gas supply and command
preferential allocation of APM
gas. Rising demand in these
sectors cannot be fulfilled by
APM gas alone, thus leaving no
option other than to depend on
incremental NELP gas supply.
APM allows gas fired generation
to compete against coal, whereas
in the fertilizer sector APM
offers opportunities to replace
the high cost feedstock. Any
upward movement in gas
pricing will certainly raise
questions over its affordability
of these sectors.
Searching the Range
At the moment wellhead prices
vary in the range of $1.96/MMbtu
for APM to $4.75/MMbtu for non-
APM gas, whereas imported
Regasified LNG (R-LNG) is being
priced in the range of $5.20/
MMbtu-$12.00/MMbtu.
Acceptable gas prices can be
derived under different emerging
scenarios by anticipating perfect
competition in the market and
affordability of key sectors.
Visit our website at: http://www.safan.com
Fertilizers
As of 31 st January 2007, the
installed capacity of urea
production was 21 MMT (Million
Metric Tones) (including non
functional capacity of 1.052 MMT),
as quoted in the ‘Annual Report-
2006-2007’ by the Ministry of
Chemicals and Fertilizers, India.
Of the total existing urea capacity,
78 percent uses natural gas, 11
percent naphtha and 11 percent
fuel oil as feed stock. The selling
price of urea is controlled and
highly subsidized by the
government. Gas demand in the
fertilizer sector accounted for 38
MMSCMD in 2006-07 (Ministry of
Chemicals and Fertilizers, India).
The regulated market selling price
of urea is $115/MT. Since
indigenous urea production is not
sufficient for domestic demand,
imports make up the shortfall. In
the period 2003 - 2007, the
International market price for urea
has been in the range of $156- $325/
MT. India imports fertilizer mostly
from Gulf countries. Input gas price
in the region is partially exposed to
international gas trade, so is urea.
Ideally any feed stock price that
can produce urea domestically for
less than the landed cost of
imported urea should be accepted.
First Cut
The analysis displays the
imputed gas price considering the
landed urea price in the range of
$180-$340/MT. Urea production
units can be broadly categorized
into four types, based on
technology and feedstock (gas,
naphtha, fuel oil and green field
projects). For the purposes of
analysis, the operational and
capital parameters are assumed
as per Ministry of Fertilizer
directive and not considered
subsidy provided by Government
of India (as subsidy is the matter
of policy).
At a landed urea price of $180/
MT, the analysis (Table1) indicates
that the average imputed price of
gas is $3.14/MMbtu for existing
units. This leaves very limited
scope for green field projects. Urea
prices in the range of $230-$260/
MT implies that an average
imputed gas price of $5.41/
MMbtu to $6.77/MMbtu which is
more in line with expected NELP
gas prices. Urea price scenario of
$340/MT and above,demonstrates
very high acceptable gas price.
Back to Home
Domestically, the present
average urea production cost is
$226/MT for existing gas units,
$538/MT for naphtha units and
$358/MT for Fuel Oil/LSHS
units(Ministry of Chemicals and
Fertilizers, India). Significant
opportunity lies in switching the
costlier liquid feedstock to gas;
since feed stock makes up sixty
five percent of urea prices.
Assuming that gas supply will be
available to replace liquid
feedstock, the implied gas price
could be as high as $20/MMbtu.
In a different development,
considering Reliance’s recently
announced Kakinada green field
project to be a perfect competitor
against existing fertilizer units,
imputed gas price is derived.
Taking Reliance imputed gas price
$4.58/MMbtu as a benchmark; the
realized production cost of urea
varies in the range of $188/MT to
$194/MT for existing units.
HYDROCARBON ASIA, SEPT/OCT 2007 19
 The landed cost of imported
urea and domestic production
determines the affordability of gas
price for the sector. Internationally
urea prices are expected to stay in
the range of $260/MT to $340/
MT, thus average imputed gas
price range $6.77/MMbtu -$9.04 /
MMbtu can be easily acceptable in
the sector.
movements in gas prices will under which all utilities will have
Power Sector certainly raise questions of gas to compete in an open market for
India’s existing installed affordability to the power sector. economic dispatch. Under merit
generation capacity stands at 134 But, it cannot be judged only by order dispatch, new gas plants will
GW as of June 30, 2007. At this comparing against the coal fired compete against existing coal and
level, India still has a deficit of generation. It is also crucial to APM gas-fired units. The average
generating capability that is consider the future revenue acceptable delivered gas price
estimated to be about 13.5 percent options available in the emerging based on comparison to existing
below peak demand and 8.7 competitive market. generation mix is around $3.00/
percent below energy demand MMbtu. (Table 2).
(Ministry of Power, India; Central Testing the Water
Electrical Authority). Under the The majority of the generation In the wholesale power market
“Power for All” initiative, the tariffs across the country are in the recently announced /commenced
projected installed generation range of Rs. 1.5/KWh to Rs. 2.5/ coal fired projects including Ultra
capacity should be at least 200 KWh. Taking this as a benchmark Mega Power Plant (UMPP) are
GW to meet power demand in for power generation, the implied setting new bench mark tariffs and
2012. As per “Hydrocarbon Vision gas price of gas varies is between $ could be potential competitors to
2025” gas fired generation is 2.67/MMbtu - $5.49/MMbtu. gas based generation. The lowest
projected to double from the imputed gas price $1.64/MMbtu
current 10 percent level of 13.4 India is in the process of is realized from bidders of UMPP
GW to about 26.8 GW by 2012. establishing a power exchange Sasan and highest $5.39/MMbtu
This growth in gas fired
generation suggests an increase
in gas demand of 153-208
MMSCMD from the current
consumption of 38 MMSCMD.

Coal is the mainstay fuel and

contributes almost 53 percent of
the total installed capacity. Power
prices across the country are
regulated. Coal price is regulated
whereas gas is on verge of
deregulation. New gas-fired plants
must compete with regulated coal
and APM gas - fired generation.
Hence any substantial upward

LNG India 20 HYDROCARBON ASIA, SEPT/OCT 2007 Visit our website at: http://www.safan.com
is from Rosa power plant. The
average imputed gas price is
around $3.81/MMbtu (Fig. 2)
It is evident from the imputed
gas price curve that pithead coal
plants are tough to compete,
whereas imported coal and non
pithead plants moderately support
higher gas prices.
Looking Beyond the Red
Tape
Emerging strategies of power
plants are focused on operating
partially or fully as merchant
enterprises and marketing their
available capacity to intrastate or
interstate traders. This allows them
to offload the available capacity at
desired price. At present, more
than 14 traders are operational and
trading around 2.5 percent of
generated electricity. This share is
growing continuously; thus the
average price of traded electricity
is a good measure to realize the
imputed gas price for merchant
capacity (Fig. 3).
Trading most of the electricity
during peak and intermittent load
requirements results into high
implied price of gas. At 85 percent
plant load factor (PLF) the implied
gas price varies in the range of
$9.56/MMbtu to $13.75/MMbtu,
whereas at 40 percent PLF this is
$7.26/MMbtu to $11.45/MMbtu.
It is evident from the analysis
that under the existing tariff
regime it is difficult to absorb high
gas prices, but, the flexibility to
offload capacity as merchant
certainly enhances the price
competitiveness of the sector.
Taking India to the World
Generally, deregulation of the
gas market broadly follows three
stages of development as shown
in fig. 4. It starts with decontrolling
of well-head gas prices, followed
by unbundling of the supply
value chain, giving impetus to
infrastructure expansion. At this
stage of development, gas trades
under mix of long and short term
contracts and priced at netback
HA
HYDROCARBON ASIA, SEPT/OCT 2007 21
 market value compared to
substitute fuels. Subsequently
discovery of single market clearing
price is achieved via a hub
(physical or hypothetical) like
structure, where bidders quote
their requirements. Such a
structure allows creation and
trading of physical and financial
risk hedging instruments like spot,
forwards, futures and options for
the underlying gas commodity.
Countdown Started
The time has come to ensure
availability of adequate gas to meet
growing energy demand and
sustain high economic growth. In
practical terms, the size and shape
of the country’s gas industry is
decided by its pricing regime.
Introduction of the right pricing
mechanism is vital as India’s thirst
for gas is high. Price can not be set
in isolation to the alternative fuels
and supply demand imbalance, as
this will discard incentive to
produce more. Any move to
bypass this will set wrong example
to private players and will hamper
future investments.
India has around 7000 km of gas
pipeline with capacity to transport
160 MMSCMD of natural gas.
Government policy of open access
and private participation to ensure
enough pipeline capacity to
evacuate gas is getting realized.
Major players are building
pipelines that will connect supply
centers to demand regions.
Although India’s gas market is
evolving rapidly; at present there
is no competitive gas market in
the country; where multi sourcing
and multi buying options are
available. Any constraint in gas
handling infrastructure will lead
to higher gas prices.
Pricing should encourage both
production and consumption;
offer incentives to existing players
switch to clean gas and allow
fair and reasonable return on
investment across the value chain
of the business.
The key off-takers (Power and
Fertilizer) approach gas pricing
differently. In the fertilizer sector
the use of gas will help to reduce
the current high production cost
whereas for power sector the
converse is true. The fertilizer
sector’s aim to produce cheaper
urea can be achieved by switching
to gas feedstock whereas the
power sector’s affordability for
higher gas price cannot be realized
without reducing T&D losses
substantially and providing
other revenue options such as
operating fractional plant capacity
comparable to merchants. HA

This publication thanks Mr. Sachin Nagdive and Mr. Hitendra Patel, of ICF International, India, for providing
this article.
Mr. Sachin Nagdive, is an Analyst, Gas Markets, with ICF International (India). He carries rich
exposures in analysis of gas demand/supply, LNG contracts, LNG pricing and risk analysis of global
natural gas/LNG trade. Mr. Nagdive has been involved in various projects related to the Indian energy
sector such as analysing gas demand in power sector, feasibility studies of setting up merchant gas based
power plant and gas monetization options in the eastern part of the country. He has also worked on various
international assignments supporting a US statutory organization for building an International Gas Model
(INGM) and an analysis of the economic comparison of gas based power plant in Oman.

Mr. Hitendra Patel is a Power Market Analyst with ICF International. His areas of expertise include
various aspects of Asset Valuation of power plants and legal proceeding with respect to bankruptcy
filing. He is currently working with a USA power major to carry out strategies to come out of
bankruptcy. He has developed a gas major evolve a right pricing strategy for the Indian markets. He
has also handled a number of projects related to feasibility study and valuation of power plants in
different US power markets. He is also instrumental in economic modeling of the Indian and USA power markets.

LNG India 22 HYDROCARBON ASIA, SEPT/OCT 2007 Visit our website at: http://www.safan.com