LNG and LPG Price Determination

Source: TH

Subject: Miscellaneous

Context: Amidst the ongoing West Asia conflict in March 2026, global crude oil prices have surged by nearly 30%, directly inflating the cost of LNG and LPG.

About LNG and LPG Price Determination:

What it is?

• Price determination for Liquified Natural Gas (LNG) and Liquified Petroleum Gas (LPG) refers to the global mechanisms and benchmarks used to set the cost of these energy resources.

• Unlike many commodities, these gases do not have a single global price; instead, they are influenced heavily by their relationship with crude oil and specific regional indices.

How it Works?

• Crude Oil Linkage: Globally, both LNG and LPG prices are generally indexed to or float alongside crude oil prices. When crude oil prices rise, the cost of these gases typically follows.

• Contractual Structures: Long-term Contracts: Much of India’s LNG (especially from Qatar) is procured through long-term agreements that provide some price stability. Spot Markets: For immediate needs, entities use the spot market, where prices are highly volatile and measured by indices such as the JKM (Japan Korea Marker).

• Long-term Contracts: Much of India’s LNG (especially from Qatar) is procured through long-term agreements that provide some price stability.

• Spot Markets: For immediate needs, entities use the spot market, where prices are highly volatile and measured by indices such as the JKM (Japan Korea Marker).

• Domestic Production vs. Imports: LPG: 60% of India’s supply is imported, primarily from Saudi Arabia and Qatar. The remaining 40% is produced domestically by Oil Marketing Companies (OMCs) like IOC and BPCL. LNG: Half of India’s requirement is produced domestically, while the other half is imported via specialized cryogenic ships.

• LPG: 60% of India’s supply is imported, primarily from Saudi Arabia and Qatar. The remaining 40% is produced domestically by Oil Marketing Companies (OMCs) like IOC and BPCL.

• LNG: Half of India’s requirement is produced domestically, while the other half is imported via specialized cryogenic ships.

Factors Affecting Prices

• Geopolitical Stability: Conflicts in West Asia, such as the closure of the Strait of Hormuz, directly hit imports and drive up war premiums on energy.

• Supply Gaps: When major producers like Qatar shut down production, it creates a massive global supply gap, forcing prices higher for all other buyers.

• Transportation and Insurance: Because LNG must be cooled to below –160°C and transported in insulated tanks, rising insurance premiums during wartime significantly increase the final landed cost.

• Storage Capacity: Countries with limited storage, like India, are more vulnerable to immediate price shocks compared to nations with large underground reserves.

Implications for India:

• Higher LPG costs threaten the progress of the Pradhan Mantri Ujjwala Yojana, which has expanded coverage to nearly 100% of households.

• A little less than 30% of natural gas is used to make ammonia for fertilizers; price spikes can lead to higher agricultural costs, though current impacts are mitigated by the off-season for farming.

• Natural gas accounts for 13% of power generation and 21% of City Gas Distribution (CGD); high prices force industrial consumers to switch to alternative fuels like naphtha or furnace oil.