Call it bad decision or misfortune, but expanding natural gas coverage to over 90% of India’s population could not have come at a worse time. In January, Adani Total Gas Limited and others received licenses to add new fields to the city gas network; In February, Vladimir Putin invaded Ukraine. Suddenly, billions of dollars of investment are on shaky ground.
After an extraordinary jump last month, European spot prices natural gas are stabilizing – at three times the average of the previous decade. According to a Bloomberg News report last week, contracted supplies of liquefied natural gas are cheap, but Europe’s clamor to secure the non-Russian fuel is waning. Worse, it’s unlikely to be a blip: Credit Suisse Group AG predicts that Russian gas shortages will lead to an annual global LNG shortage of about 100 million tons by the middle of the decade.
This is not what New Delhi decided to increase the share of natural gas in India’s energy mix from 7% to 15% by 2030 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 is an improvement over diesel. It’s something to hold on to until better alternatives — such as green hydrogen — become affordable to emerging markets.
However, the environment is not the only reason Prime Minister Narendra Modi has promoted city gas projects in a big way. The move also has political significance. Piped natural gas, or PNG, is delivered to urban homes, easing demand pressure on liquefied petroleum gas, or LPG, cylinders. They can then be pushed to rural areas where the government has helped poor households open 90 million new LPG accounts to help them access clean cooking gas from burning wood, coal, cow dung or kerosene. The campaign cemented Modi’s popularity with women voters, which is why the 2016 event saw a surge in nominations before his successful 2019 bid again.
But the economics of PNG – and CNG, compressed natural gas – supplied to motorists as an alternative to petrol and diesel – falter. State-run Oil and Natural Gas Corporation and Oil India Ltd. produce the gas domestically, as does Reliance Industries Ltd. in partnership with BP plc. Under a complex pricing formula, this output is allocated to the city’s gas and fertilizer firms, the two largest users, as well as power stations and LPG plants.
Prices are artificial. As of last month, government-administered gas was priced at $2.9 million per million British thermal units – hardly enough for producers to make much money. The price of gas extracted from difficult deep-sea Indian fields was permitted at $6.1 per million BTU. Compare what the market is charging: Japan-Korea’s June delivery contract, an Asian benchmark, exceeded $50 per million BTU in March, and is currently about half that level.
Cheap pricing provided prosthetic legs to demand. The Indian government enthusiastically announced two years ago that it had invested $66 billion in everything from pipelines to city gas infrastructure and LNG regasification terminals.
The problem is with the supply. It turned out to be less generous than originally expected after the discovery of Reliance’s gas on India’s east coast a decade ago. As local production never responded to the government’s complex 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 the cost of imported cargo is high, there is a great appetite for local goods, especially in the city gas industry, which has become breathless from government incentives.
There is an additional complication. Setting aside more for city use means paying less to the fertilizer industry, forcing it to pay a higher compound price to make nitrogen-rich products that go into India’s agricultural lands. It’s a boomerang on taxpayers because the farmer’s cost of urea is also subsidized: Every $1 increase in the price of gas feedstock for fertilizer impacts New Delhi’s budget calculation by nearly $600 million. As the global food shortage intensifies, the only hope for India is that its farmers will give the country a bountiful harvest. Fertilizers cannot be tricked.
The economy of urban gas supply will still be a mess. India this month raised the administered home price to $6.1 per million BTU from $2.9. City gas distributors will take it easy as LNG imports are much more expensive, but the government is withholding supplies at March 2021 levels.
High expectations of growth in gas demand in India are set to be dashed, putting a question mark on the financial viability of licenses won by investors. The inevitable increase in retail prices will not go down well with the public. Indian consumers do not have the income power of their European counterparts; Nor can they expect a check in the mail to help them deal with the high prices. Cab drivers in India’s capital are already protesting.
The fall in demand in India will not move global prices, but China, the world’s biggest LNG importer, is a different story. If the COVID-19 lockdown in Shanghai lasts longer and spreads more widely, more additional Chinese gas supplies could hit the spot market. While President Xi Jinping’s drastic actions may relieve the headache inflicted by Putin, it still may not make Modi’s urban gas ambition a sound proposition beyond the big metros.
India’s domestic gas production is small, and has fallen by 40% in the past nine years. Keeping that base narrow with volatile pricing and building a national building of unviable city distribution franchises on top of it was not a financially prudent move. The cheap gas dream could not work out anyway, what the war in Ukraine might have done was abruptly ended.
This story has been published without modification in text from a wire agency feed. Only the title has been changed.