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India's natural gas prices set to remain in check

In spite of the fluctuation in global natural gas prices in 2014, the price of the fuel in India has generally remained fairly solid, at $4.2 an mmbtu.

A key reason behind this has been the government deferring raising the price of domestic natural gas on two occasions, though this finally came to an end when a new rate of $5.61 per mmbtu was announced, to be effective November 1st.

This price is lower than that suggested earlier reports of $6 to 6.5 a unit, and is far lower than what the Rangarajan Committee had recommended, which was around $8.4 a unit.

Countering output

This is set to be revised on a half-yearly basis, and may go some way to countering domestic gas output in India, which has slipped over the past few years, mainly due to production woes at the KG-D6 basin of Reliance Industries.

As such, the country’s dependence on imported liquefied natural gas has been rising, from around 29 per cent in August 2013, to more than 35 per cent the same month this year.

Currently, long-term LNG contracts linked with crude oil prices form a key part of the country’s gas imports, but spot or short-term contracts are also significant, and account for more than a third of the LNG imports at the moment.

Across Asia, the price of the short-term contracts has fluctuated sharply over the course of the year, which has been mainly driven by the demand dynamics of the two largest gas importers - Japan and Korea.

After standing at just over $20 per mmbtu in early 2014 due to high demand and a shortage of spot cargoes, spot LNG prices in Asia fell to less than $11 per mmbtu in June-July, which was the lowest total for several years,

A relatively mild summer in Japan and the restarting of nuclear plants in Korea dragged LNG demand, while increased supplies from big producers such as Qatar were also a factor.

Bouncing back

However, Asian LNG prices have begun inching back in recent times, standing at around $14-$15 per mmbtu, assisted by supply cuts and expectations of improvement in demand with winter approaching.

Although the upside in spot gas prices could be restricted to the short term, the recent rapid decline in crude oil prices could give more bargaining power to gas importers to substitute among fuels and between term and spot gas contracts, which would subsequently enable importers to negotiate lower rates.

Furthermore, it looks like spot cargo supply will be sufficient to meet winter demand in Asia which - when combined with the recent announcements in India - indicates that the general period of stability is likely to continue in the months ahead.

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