India took the unpopular step of approving a gas price rise for the first time in three years on Thursday, a move which could inject much needed investment in local production but boost imports of more costly liquefied natural gas (LNG).
"On gas pricing, the proposal of the Rangarajan Committee has been accepted," Food Minister K. V. Thomas told reporters after a cabinet meeting, referring to a formula which has produced indicative prices around double current levels.
The move will be unpopular with voters as local and national elections loom in the next 12 months, but is key to easing acute power shortages in the country, where cheap gas deters investment and keeps demand way above actual use.
Indicative pricing has suggested domestic gas could rise to around $8.4-8.5 per mmBtu with the new mechanism, drawn up by a committee headed by C. Rangarajan, from a current $4.2 mmBtu. That would help boost revenues of producers like state-run Oil and Natural Gas Corp and Oil India.
That would be in line with Indonesia's gas prices which are $6-9 per mmBtu but still short of typical LNG import costs.
The government needs to encourage power production in order to help revive Asia's third-largest economy that grew at its slowest pace in a decade in the year ending March 31, 2013.
Demand for gas in India far outstrips consumption, but prices have been kept low for strategic industries, deterring investment in the sector. India has few energy resources other than coal and is the world's fourth-biggest importer of fuel.
"We have a massive shift this year in India from gas to coal, similar to Europe. And the reasons have to do with limited domestic capacity to produce gas and high LNG prices, and the reasons for that have to do with the Indian pricing system," said Christof Ruhl, group chief economist at energy giant BP, at a presentation earlier on Thursday.
Currently, India uses coal for nearly 56 percent of its energy needs, with oil filling 26 percent and gas a distant third at 10 percent. It wants to double the share of gas in the mix by 2020, replacing more expensive diesel and fuel oil.
Without a price rise, India's gas demand would have risen to 466 million cubic metres a day (mcmd) in 2016/17 from 286 mcmd, the government calculated, and supply would be only half that.
Some political parties see the move as aimed at helping Reliance Industries, which has been calling for an increase in gas prices when its contract for sales from its gas block off the east coast expires on April 1, 2014.
Reliance and BP could commercialise other discoveries in the block and help reverse declining production there, said a source privy to Reliance's operations.
And while the reform will still not bring domestic prices in line with imported LNG costs, it will narrow the gap enough to encourage investment in infrastructure to handle higher imports.
Industries that can't get low-priced local gas, which has been restricted by the government to key sectors like fertiliser producers and some power plants, will take LNG as it is still cheaper than alternatives like diesel, fuel oil and naphtha.