Home » Energy » China increases gas price to $10.64 per unit, what will India do?

China increases gas price to $10.64 per unit, what will India do?

Gautam Chikermane’s tweets


Over the next 10 days, while India would be entering the next round of debate on gas pricing, China will be acting on gas price reforms it initiated in July 2013. On September 1, 2014, bulk and non-residential users in China will face a rise of 20 per cent in the prices they pay for gas, to $10.64 per million metric British thermal units (mmBtu).

“The latest price increase takes the domestic price for bulk users to about $10.64 per mmBtu, roughly on par with the current Asian spot price for LNG at $10.80 per mmBtu and the reported price of around $10 per mmBtu for the Russian pipeline deal,” Reuters reported.

So, even as it initiates price reforms on the demand side, it is simultaneously strengthening its supply pipelines through a $400 billion and hugely-complex deal. Under this deal, signed in May 2014, Russia will supply 38 billion cubic meters (bcm) of gas to China every year for three decades, beginning 2018.

“While both China and Russia are tight-lipped about the price of gas, analysts place it at between $10 and $11 per mmbtu. UBS estimates another $3 per mmbtu in “transmission tariffs”, taking the price of Russian gas reaching Shanghai to $14.2 per mmbtu,” I wrote in First Post, while covering the deal.

There is another reason why this price rise has come along with an increase in supply. “PetroChina has contracted LNG from Qatar at $18 per mmBtu, while the border price for piped gas from Russia is understood to be around $10/MMBtu,” Energy Intelligence reported on August 25, 2014. “While the pipeline flows could temper future LNG demand, the price reforms could make the superchilled gas more affordable.”

The big picture for China is to ensure that gas prices are increased such that it catalyses exploration and production, ensures there is no cut in demand, while pursuing a clean energy policy (gas is less polluting than oil). In other words, balance the interests of three key stakeholders — consumers, business and the environment.

India’s debate has been skewed by politics. So, even as we wonder whether the Rangarajan formula is acceptable or a new one, whether the price of gas should be $8.4 per mmBtu or something between $6 and $8 per mmBtu, we continue to import gas from Qatar at a landed price of $14 per mmBtu, effectively pay Qatar a high price while keeping domestic explorers and producers hanging.

“State-run Oil and Natural Gas Corp has told the government that gas production from some of its deep-sea fields would be viable only at prices of up to nearly $13 per unit,” The Economic Times reported in an April 4, 2014 story. “It has asked for prices of $10.72 to $12.63 for two blocks in the Mahanadi basin, close to RIL’s KG-D6 block, where gas has been sold at $4.2 since 2009.”

In an August 25, 2014 story, The Economic Times reported that ONGC, Reliance Industries and Cairn, India’s largest explorers and producers sought an immediate hike in gas price. “Sources said producers reiterated that the sanctity of production sharing contracts (PSC), which the government has entered into with them, should be maintained. The PSC provides for a market discovered gas price.”

Disclosure: I am the New Media Director at Reliance Industries Ltd.

What the Narendra Modi government decides the final gas price in the next 10 days, it needs to examine three issues. One, the pricing should encourage global investors to come in and set up exploration and production facilities in the harsh deep-waters of India. Two, the PSCs it has signed with companies need to be honoured. And three, it should decide on the basis of law and logic, not out of fear of allegation politics.




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