LNG and LPG Price Determination: Factors, Global Markets and Pricing Mechanism

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.

What is it?

• 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 Does it work?

• 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).

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.

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.

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