Gas might be priced 15% lower on fall in crude rates

The industry expected by 2017, about 60%t of LNG contracts would be oil-based and 15% gas-based; the rest would remain un-contracted and traded in spot markets

With global crude oil prices hitting a four-year low, global gas buyers, led by those from Japan, are asking sellers to shift to gas-to-gas pricing, rather than linkage with crude oil prices.

In India, the notified Rangarajan formula, which is yet to be implemented, has attempted such a linkage by considering the average price of the gas imported, as well as those in global markets. Most of this gas remains linked to crude oil prices.

Aditya Gandhi, director, Sapient Global Markets (India), says as Brent crude oil prices have fallen about 19 per cent and Henry Hub prices eight per cent, the price based on the Rangarajan formula should decline about 15 per cent.

"In fact, people have started debating whether gas-linked pricing will end up being costlier than oil-based pricing in the near term and some companies are already seeking to lock in some of their US liquefied natural gas (LNG) in long-term sales to the European Union to reduce the exposure to this."

He added the industry expected by 2017, about 60 per cent of LNG contracts would be oil-based and 15 per cent gas-based; the rest would remain un-contracted and traded in spot markets. "Today, the spot market and hub-based pricing contracts account for a much smaller percentage but are starting to show active growth, with more and more buyers looking to book hub-based contracts and more and more sellers leaving some volumes un-contracted, to be able to sell in spot markets."

GAIL India, the country's biggest marketer of natural gas, buys about 30 per cent of its imported gas at prices linked to Henry Hub; 70 per cent is linked to crude oil prices.

B C Tripathi, chairman and managing director of GAIL India, termed the fall in crude oil prices "a phenomenon", adding gas prices, too, were falling. In the US, the Henry Hub price is $3.6 per million British thermal units (mBtu). "These will soften further," he said.

GAIL has a contract to import natural gas from the US in LNG form from 2017.

According to the Federal Energy Regulatory Commission, the estimated landed price of LNG in India was $17.63 per mBtu in March; now, this has declined to $14.10.

Prices of domestically produced natural gas are decided by the government. Last month, the Centre had decided to defer a decision on gas-pricing till the end of November.

Reliance Industries, the country's largest private petroleum company, is selling gas from its KG-D6 basin at $4.2 per mBtu. A price revision for its gas has been due from April 1 this year.

GAS-TO-GAS PRICING

• The notified Rangarajan formula, yet to be implemented, has attempted such a linkage by considering the average price of the gas imported, as well as those in global markets
   
• Industry expects by 2017, 60 per cent of LNG contracts will be oil-based and 15 per cent gas-based; the rest will remain un-contracted and traded in spot markets
  

 

GAIL India, the country's biggest marketer of natural gas, buys about 30 per cent of its imported gas at prices linked to Henry Hub; 70 per cent is linked to crude oil prices