04 January 2016

Cooking Gas Subsidy in India – A radical approach is needed

Last week Government of India announced that it will not pay subsidy on cooking gas – (Liquefied Petroleum Gas or Propone or LPG) for consumers with declared income of above Rs. 1 million per annum. Government hopes to save approximately Rs. 200 per 14.2 Kg cylinder which typically lasts a month for an average family of four. We applaud this effort to reduce subsidy payment, and reorient the government expenditure towards investment rather than subsidy.

However, we believe a more radical approach is possible to be undertaken, where cooking gas subsidy can be completely eliminated in next three years and at the same time India’s import bill can be approximately halved from the current base case. The rational for the proposed radical approach is described below:

  • Indian Oil Limited paid, on 9th Dec 2015, $443.50 per metric tonne of LPG as C&F West Coast India price1. In terms of MMBTU, at 47.3 MMBTU per tonne of LPG, the price works out to $9.37 per MMBTU.
  • It must be noted that LPG prices are linked to crude oil, and Brent was generally trading just below $40 per barrel in December 2015, mainly on the back of market share fight between Saudi Arabia and US Shale Producers. Saudis, in the medium term, expect to win this battle and hope to take the price up to about $60 to $80 by 2018. If they succeed in this strategy, the expected price of LPG can well be in $15 to $20 per MMBTU range.
  • In Oct 2015, the US government estimated that India paid landed price of $6.84 per MMBTU for LNG2. Since LNG market is a function of natural gas, and since natural gas production is booming or expected to boom in democratic countries such as the USA, Australia and Isreal, it is possible, at this juncture, to hold strategic discussions and tie up purchases for next decade or so at $5 to $6 range from this oversupplied market.
  • Right now, India supplies natural gas as cooking fuel to handful of cities only, Mumbai and Delhi being the only two metros currently covered.
  • The government should strategically tie up with large suppliers LNG cargos, as a replacement for LPG from end of 2017, and in next two years, on war footing try to supply to at least half of urban India natural gas instead of LPG.
  • This strategic initiative will save India precious foreign exchange and at the same time will avoid the need for subsidy being paid on LPG, as the retail price of piped natural gas will be lower than the subsidized price of LPG.
  • Also, once the pipeline network is laid for carrying natural gas for cooking purposes, the same pipeline network can be used to supply natural gas to automobiles. Since natural gas is significantly cleaner than diesel, this added benefit will lead to cleaner air in India cities and also further reduce India’s import bill for diesel, as natural gas is expected to be continued to be cheaper than diesel for foreseeable future.

We believe Modi Government should take this initiative as strategic national goal, just as renewables energy goal and road network goal undertaken by the government

1 http://ppac.org.in/WriteReadData/userfiles/file/PP_9_PriceBuildupSensitiveProducts.pdf
2 https://www.ferc.gov/market-oversight/mkt-gas/overview/ngas-ovr-lng-wld-pr-est.pdf