The government could this week take the unpopular measure of raising gas prices for the first time in three years as it pushes a package of reforms aimed at giving industry a boost, reviving a spluttering economy and boosting LNG imports.
With local and national elections looming in the next 12 months, the coalition government is expected to try to minimise voter backlash by hiking gas prices sooner rather than later.
Raising prices nearer to world levels could boost investment in the sector, increasing much needed supply in the world's fourth-largest energy user, and make liquefied natural gas (LNG) imports from major producers like Qatar more attractive.
Finance Minister P. Chidambaram has listed gas pricing as one of the issues he expects to resolve before the end of June, after ratings agency Fitch urged reforms. Oil Minister M Veerappa Moily has said the government may even act this week.
"This would be a good time for the government to consider raising the gas prices as investments in the country's oil and gas sector are drying up and private sector players are cautious," Praveen Kumar, an analyst with FACTS Global Energy, said on Tuesday.
"A price hike is never a popular move among the masses...the government has to bite the bullet and it would be in the government's interest to act sooner than later (just before elections)."
Moving now, the government could take advantage of what is shaping up to be a bountiful monsoon that will boost farm output and rural wages to soften the blow for the powerful agricultural lobby. It could package the gas price hike with other reforms and its plans for more cheap food would sweeten the pill.
The existing contract which set $4.2 per mmBtu as a benchmark expires on April 1, 2014, with national elections due by May 2014. That formula was set for gas from Reliance Industries' KG basin field and other contracts were raised to match it in May 2010.
The new formula, which is likely to use U.S. export prices and Japan's import numbers, may boost prices at least 60 percent to $6.7 per mmBtu, according to the oil ministry's indicative calculation -- still only about half LNG import costs.
PRICE HIKE TO BOOST LNG IMPORTS
Without a price increase, India's gas demand will rise to 466 million cubic metres a day (mcmd) in 2016/17 from 286 mcmd, the government calculates, and supply will be only half that.
"In a country like India, different prices of gas and regulation at downstream level has skewed demand. Every one wants gas at $4.2 (per mmBtu)," said Prabhat Singh, marketing head at GAIL (India) Ltd, India's biggest gas pipelines owner.
India wants to double the share of gas in its energy mix, currently 10 percent, by 2020 and squeeze out expensive diesel and fuel oil. It gets nearly 56 percent of its energy needs now from coal with oil providing 26 percent.
"Any increase will help in increasing the acceptability of imported LNG in the country," said R. K. Garg, finance head at LNG importer Petronet LNG, 50 percent owned by state-run firms.
Petronet estimates potential demand at $11-12 per mmbtu -- not just from refineries and transport firms but also kicking in from power plants and fertiliser makers -- could boost LNG imports five times by 2015, from 40 mmscmd in 2012. Even at $16-17 per mmbtu imports could triple.
For suppliers of domestic gas, higher prices are key for investment in exploration and to boost existing output.
"Producers argue that unless they are assured of prices linked to world prices, no investment will take place in this sector," said a planning commission document.
Critics say the government is raising prices to favour Reliance, but the company and its partner, energy giant BP , say an increase is needed to support investment in turning around declining production at their KG field.
A price of $6-$9/mBtu would make it commercial to develop other discoveries nearby which could boost supplies, said a source privy to Reliance's operations.
"It will be applicable for everyone ... There will be one price in the country," Moily said last Friday. "I am not playing for any lobby. I am playing for the national lobby."