Natural gas is a combustible, gaseous mixture of simple hydrocarbon compounds, usually found in deep underground reservoirs formed by porous rock. Natural gas has many qualities that make it an efficient, relatively clean burning, and economical energy source.
Uses of Natural Gas in India
Gas-based power generation contributes roughly 46% of the demand, and the share of the fertilizer sector is 20% The share of the CGD (city gas distribution) segment is 9% in the same period, whilst industry was to account for a share of about 7% in 2020-21. Petrochemicals contribute 15%, while iron & steel about 2% in 2020-21.
In recent years the demand for natural gas in India has increased significantly due to its higher availability, the development of transmission and distribution infrastructure, and the savings from the usage of natural gas in place of alternate fuels. The demand for natural gas in India is expected to grow at a CAGR of 6.8% to 746 MMSCMD in 2029-30
The Indian government has recently announced that it plans to increase its share of gas consumption, and transform the country into a “gas-based economy”. It has set a target to increase the share of gas in its energy mix from 6% in 2021 to 15% by 2030. To achieve this target, the government has taken several initiatives such as the Expansion of the National Gas Grid to about 33,500 Km from the current 21,715 Km. Expansion of City Gas Distribution (CGD) network, Setting up of Liquefied Natural Gas Terminals to name a few.
Pricing of Natural Gas in India
India uses a dual pricing system. They are:
- APM (Administered Price Mechanism): The gas prices under this mechanism are set by the government of India. This method of pricing is followed for gas used by the power and fertilizer sectors.
- Non-APM or Free Market Gas: is further divided into two categories, namely, domestically produced gas from Joint Venture fields and imported LNG. The pricing of JV gas is governed in terms of the PSC (Production Sharing Contract) provisions. While the price of LNG under term contracts is governed by the SPA (Sale and Purchase Agreement) between the LNG seller and the buyer. Indian companies pay for the imported gas, the prices of which are market linked.
Why did the prices of Natural Gas crash in International Markets?
The Prices of Natural gas in international markets have been on a tear since the invasion of Ukraine by Russia in Feburary’22. Russia is a key supplier of Natural gas to the European Union. During the second half of the year, the prices of natural gas remained at higher levels as Countries were stocking and storing natural gas in anticipation of colder-than-usual winters.
The recent crash in natural gas prices is caused by several factors:
- Europe’s gas storage is basically full for this winter season and temperatures have been milder than expected thus delaying the start of a period of heavy usage and
- There is an oversupply of liquefied natural gas (LNG). The latest data compiled by industry group Gas Infrastructure Europe shows storage levels in Europe are sitting at 94%.
- EU countries agree to cap the prices of Natural Gas to contain the energy crisis.
How to benefit from the crash of Natural Gas prices in the International Market?
A fall in natural gas prices is beneficial for companies in Chemicals, Steel, Fertilizer, and City Gas distribution space to name a few. There are few good companies in these sectors that are looking attractive for investment from a long-term perspective.