How Vladimir Putin’s war ended India’s cheap natural gas dream – EQ Mag Pro
India’s domestic gas production is already tiny & it has shrunk by 40% over past nine years. Keeping that base narrow with unsustainable pricing wasn’t a financially prudent move.
Call it poor judgment or bad luck, but India’s expansion of natural gas coverage to more than 90% of its population couldn’t have come at a worse time. In January, Adani Total Gas Ltd. and others won keenly contested licenses to add new areas to city gas networks; in February, Vladimir Putin invaded Ukraine. Suddenly, billions of dollars in investment are on shaky ground.
After an extraordinary surge last month, European spot prices of natural gas are stabilizing — at three times the average of the past decade. Contracted supplies of liquefied natural gas are cheaper, but with Europe scrambling to secure non-Russian fuel, the discount is shrinking, according to a Bloomberg News report last week. Worse still, it’s unlikely to be a blip: Credit Suisse Group AG predicts that the Russian gas deficit will lead to an annual global LNG shortage of nearly 100 million tons by the middle of the decade.
This isn’t what New Delhi anticipated when it decided to raise the share of natural gas in India’s energy mix to 15% by 2030 from under 7% now, as part of a plan to improve air quality. India had nine of the world’s 10 most polluted cities in 2020. Natural gas doesn’t eliminate carbon emissions, but it’s an improvement over diesel. It’s something to hold the fort until better options — such as green hydrogen — become affordable for emerging markets.
The environment, however, isn’t the only reason Prime Minister Narendra Modi has given a massive push to city gas projects. The move also has political significance. Piped natural gas, or PNG, delivered to urban homes relieves the demand pressure on liquefied petroleum gas, or LPG, cylinders. Those can then be pushed to rural areas where the government has helped poor families open 90 million new LPG accounts to help them migrate from burning wood, coal, dung-cake or kerosene to using cleaner cooking gas. The campaign buttressed Modi’s popularity with women voters, which is why the 2016 program saw a jump in enrollment before his successful 2019 reelection bid.
But the economics of PNG — and CNG, compressed natural gas supplied to motorists as an alternative to gasoline and diesel — is wobbly. State-run Oil & Natural Gas Corp. and Oil India Ltd. produce gas domestically, as does Reliance Industries Ltd. in partnership with BP Plc. Under a complex pricing formula, this output is allocated to city gas and fertilizer firms, the two biggest users, as well as power stations and LPG plants.
The prices are artificial. Until last month, the government kept the administered gas price at $2.9 per million British thermal unit — hardly enough for the producers to make much money. The gas extracted from difficult deep-sea Indian fields was allowed to be priced at $6.1 per million Btu. Compare that with what the market is charging: The June delivery contract of the Japan-Korea marker, an Asian benchmark, shot past $50 per million Btu in March, and is currently at about half that level.
The cheap pricing provided just-as-artificial legs to demand. The Indian government enthusiastically declared two years ago that $66 billion in investments were lined up into everything from pipelines to city gas infrastructure and LNG regasification terminals.
The trouble is with supply. It petered out a decade ago after Reliance’s gas discovery off India’s eastern coast turned out to be less bountiful than originally expected. Since local production never responded to the government’s complicated pricing signal, industries paid $8 to $10 per million Btu for imported LNG in addition to their domestic gas quotas. That was before the war. Now that imported cargo costs a lot more, there’s great hunger for the local stuff, especially in the city gas industry that has grown breathlessly with the government’s encouragement.
There’s an added complexity. Setting aside more for city use means giving the fertilizer industry less, forcing it to pay a higher blended price to make the nitrogen-rich products that go into India’s agricultural land. That boomerangs on the taxpayer because the farmer’s cost of urea is also subsidized: Each $1 increase in the gas feedstock price for fertilizer hits New Delhi’s budget calculations by roughly $600 million. As global food shortages intensify, the only hope for India is that its farmers would feed the country with blowout harvests. Fertilizers can’t be trifled with.
The economies of urban gas supply will get messier still. India this month raised the administered domestic price from $2.9 to $6.1 per million Btu. City gas distributors will readily take that because LNG imports are much more expensive, but the government is holding down the supply at March 2021 levels.
The lofty expectations for demand growth of gas in India are bound to come crashing down, putting a question mark on the financial viability of the licenses won by investors. The inevitable increases in retail prices won’t go down well with the public. Indian consumers don’t have the income power of their European counterparts; nor can they expect checks in the mail to help them cope with higher prices. Cab drivers in India’s capital are already protesting.
Demand destruction in India won’t move the needle on global prices, but China, the world’s biggest LNG importer, is a different story. If the Covid-19 lockdown of Shanghai lasts longer and spreads more widely, more spare Chinese gas supply could hit the spot market. While President Xi Jinping’s draconian actions may take the edge off the headache given by Putin, it still may not make Modi’s city gas ambition a sound proposition beyond large metropolises.
India’s domestic gas production is tiny, and it has shrunk by 40% over the past nine years. Keeping that base narrow with unsustainable pricing and erecting on top of it a national edifice of unviable city distribution franchises wasn’t a financially prudent move. The dream of cheap gas couldn’t have lasted anyway, all that the war in Ukraine may have done is to end it abruptly.
Source: PTI
