Whether it was terrible timing or bad judgment, India’s extension of natural gas coverage to more than 90% of the population couldn’t have come at a worse moment. In January, Adani Total Gas Ltd and others were awarded hotly fought rights to expand city gas networks, while Vladimir Putin invaded Ukraine in February. Suddenly, billions of dollars in investments have become insecure.
Following a meteoric rise last month, European spot natural gas prices are now stabilizing at three times the ten-year average.
According to a Bloomberg News story, contracted supplies of liquefied natural gas are cheaper, but the discount is reducing as Europe scrambles to get non-Russian fuel. Worse, it’s not likely to be a fluke: According to Credit Suisse Group AG, by the middle of the decade, the Russian gas shortfall would result in a worldwide LNG scarcity of over 100 million tons.
This is not what New Delhi expected when it planned to increase the percentage of natural gas in India’s energy mix from under 7% presently to 15% by 2030 as part of a strategy to enhance air quality.
In 2020, India has nine of the top ten most polluted cities in the planet. Although natural gas does not completely remove carbon emissions, it is a significant improvement over diesel. It’s enough to hold the fort until more cost-effective alternatives, such as green hydrogen, become available in emerging economies.
However, Prime Minister Narendra Modi’s support for city gas projects isn’t just motivated by environmental concerns. The action is also significant from a political standpoint. Liquefied petroleum gas (LPG) cylinders are relieved by the delivery of piped natural gas (PNG) to urban dwellings.
These may then be sent to rural regions, where the government has assisted impoverished people in opening 90 million new LPG accounts in order to enable them transition from wood, coal, dung-cake, or kerosene to cleaner cooking gas.
Modi’s popularity with women voters was bolstered by the campaign, which is why enrolment in the 2016 program increased before his victorious reelection run in 2019.
However, the economics of PNG — and compressed natural gas, which is sold to cars as a substitute for gasoline and diesel — are shaky. Domestically, state-run Oil & Natural Gas Corp. and Oil India Ltd., as well as Reliance Industries Ltd. in cooperation with BP Plc, generate gas.
This production is distributed to the two largest customers, city gas and fertiliser companies, as well as power plants and LPG plants, according to a complicated pricing mechanism.
The prices are manipulated. The government held the administered gas price at $2.9 per million British thermal units until last month, which was barely enough for the producers to earn a profit.
The price of gas collected from problematic deep-sea Indian resources was set at $6.1 per million Btu. When you compare it to what the market is charging, you’ll see that the market is charging: In March, the June delivery contract of the Japan-Korea marker, an Asian benchmark, surpassed $50 per million Btu, but is now less than half that price.
Demand had just-as-artificial legs thanks to the low prices. Two years ago, the Indian government boasted that it had lined up $66 billion in investments in everything from pipelines to city gas infrastructure and LNG regasification installations.
The issue is one of supply. It died out a decade ago when Reliance’s gas find off India’s eastern coast proved to be less abundant than projected
Industries paid $8 to $10 per million Btu for imported LNG in addition to their domestic gas limits since local output never reacted to the government’s convoluted price signal. That was before to World War II.
Now that imported cargo is much more expensive, there is a big demand for local goods, particularly in the city gas business, which has developed at a breakneck pace thanks to the government’s assistance.
There’s a layer of complication on top of it. Setting aside more for city use means providing less to the fertiliser sector, requiring it to pay a higher blended price for the nitrogen-rich goods that flow into India’s agricultural land.
This has a knock-on effect for taxpayers because the cost of urea for farmers is also subsidized: New Delhi’s budget projections are affected by almost $600 million for every $1 increase in the gas feedstock price for fertiliser. As global food shortages worsen, India’s only chance is for its farmers to produce bumper crops. Fertilizers are not to be taken lightly.
The economics of urban gas delivery will become much more complicated. The administered domestic price in India was boosted this month from $2.9 to $6.1 per million Btu. Because LNG imports are substantially more expensive, city gas distributors will gladly accept this, but the government is limiting supply at March 2021 levels.