Sunday, April 7, 2013

Data source: DNA Money
*At the end of 2011

The natural gas segment has witnessed a revolution with huge shale gas discoveries in the US. The supply glut has softened prices that now range around US$ 2 per million metric British thermal unit (mmbtu) to US$ 3 per mmbtu in the US. In contrast, even at subsidised rates domestic gas price in India is pegged at US$ 4.2 per mmbtu. The cost of imported gas is around three to four times of that. If the recommendations from Rangarajan-led committee are acted upon, the domestic gas price may even double. This may seem to be against the natural economic law that suggests that prices for a commodity should ease as supply goes up.

The chart of the day shows the countries with the highest remaining recoverable natural gas reserves (including conventional and unconventional sources). The total world recoverable reserves stood at about 752 trillion cubic metres at the end of 2011. With ongoing new discoveries, the supplies are increasing.

However, when it comes to India, there are further dimensions to look at. We are consistently witnessing a decline in the domestic gas supplies. At current prices, upstream energy companies have hardly any incentive to invest in further exploration of domestic gas. This has made the domestic supply scenario very bad. As such, it is through costlier imports that domestic gas demand is being met. Once gas is transferred across the nations through pipelines in the form of Liquefied natural gas (LNG), there are other cost components that get associated. These include investment in liquefaction plants, transportation costs etc to mention a few. Hence, it will be unfair to compare the gas prices in India with natural gas price in US.

While discovery of shale gas reserves is a positive for the sector, it requires significant investment with regards to time, technology and money before the gas can be consumed. Besides, there are some serious environmental concerns that need to be taken care of. To be self sufficient in the long term, we need to incentivise the energy sector to ensure domestic and foreign investments in gas projects. And for that, gas price hike may be required. Once the supply gets unlocked, prices will be rationalised in the long run.