Plentiful gas will result in buyer/seller price tension

Vol 10, PW 25 (19 Apr 07) People & Policy

India's present scarcity of gas makes it a sellers market, as buyers are forced to choose between more expensive competing fuels like naphtha or cheap but dirty domestic coal.

But this situation will change radically when gas supplies flood the market, believes ABN Amro. “With existing contracts up for renewal (mostly in 2008) and new contracts for Reliance (D-6) gas required, pricing is likely to become a tug-of-war between buyers and sellers,â€‌ says ABN Amro.

“The likely preference of domestic sellers would be to peg pricing to the international price of oil or gas, whereas buyers, especially power consumers, would prefer more stable pricing, without a link to international price movements.â€‌ Power and fertiliser industries - the main gas consuming sectors – are politically sensitive, says the report.

“It remains to be seen whether the government of India stays a mute spectator in the whole process, given that additional domestic gas supplies are coming from NELP fields where it has allowed free pricing of oil and gas.â€‌ Also important will be the term of the contract.

“Producers are likely to want contracts for not more than three to five years so they can maximise their gas output,â€‌ says ABN Amro. But consumers, says the report, would want contracts for between 12 and 15 years.

"We do not believe any company would be willing to put up a new plant unless there is supply security for at least 12 years," cautions the bank. ABN Amro believes the power sector will play a critical role in the domestic gas market because, "it offers the highest demand potential and we find it difficult to assume the additional gas supplies that we forecast can be absorbed in the Indian market without relying on the power market."