Gas Pricing Policy in India- Background, Pricing Mechanism & Recent Measures
In April, the government approved a set of reforms for gas pricing. This move came amid a global rise in gas prices- something that was hurting Indian consumers, given India’s significant import dependence. The new gas policy is expected to reduce the gas prices for domestic consumers.
- The gas sector was subject to significant level of state control before 1991. The sector saw minimal participation from the private sector.
- Most of the natural gas was produced by state-owned entities like ONGC from nomination fields or legacy fields.
- Legacy fields are those acreages that were awarded by the government to ONGC and OIL, pre-1999.
- Post-1999, oil and gas blocks were awarded through auctions.
- The gas prices were set by the government. For this, the government uses the APM or administered price mechanism which is mainly applied to the legacy field gas.
- APM gas price was determined according to the ‘modified’ Rangarajan formula.
- It took into account the volume-weighted average price at 4 major hubs:
- Henry Hub in USA
- National Balancing Point in UK
- Alberta Gas in Canada
- The prices were revised once every 6 months.
- The implementation of the revised prices was with a lag of a quarter.
- In 1997, the New Exploration Licensing Policy was introduced to enable participation of the private sector and to attract more foreign investment. This was replaced by the HELP regime (Hydrocarbon Exploration Licensing Policy) in 2016.
- In 2016, a gas pricing regime was introduced for gas from difficult blocks like:
- Reliance Industries and BP’s KG-D6
- ONGC’s KG-DWN-98/2
- This regime allowed pricing freedom, subject to a ceiling price which was revised once every 6 months, alongside the APM price revision.
- Between January 2021 and February 2023, international gas prices increased 228%. However, India experienced only 1/3rd of the global price rise. For instance, the rise in CNG prices in India was limited to 83%.
- This has been achieved with the help of steps like:
- Increase in allocation of domestic APM gas
- Diversion of gas from non-priority sectors to domestic and transport segments, etc.
- Recently, the government undertook a series of APM gas pricing reforms.
What is the new gas pricing policy?
- The revised gas pricing mechanism is based on the recommendations of the Kirit Parikh Committee.
- This committee was set up in 2022 to review the gas pricing formula.
- The price of APM gas is now benchmarked to 10% of the imported crude oil basket, instead of the price at the 4 international gas trading hubs.
- The new policy provides for floor and ceiling prices- at $4 and $6.5 per mBtu (million British thermal units) respectively.
- The price revision is to be done monthly, instead of biannually.
- The ceiling price is not to be revised for the next 2 years. After that, the cap would be raised by 25 cents per year to adjust for cost of inflation.
- Gas produced from new wells will receive a 20% higher price.
- The pricing formula change isn’t applicable to gas produced from difficult acreage i.e. deep water, ultra-deep water, high-temperature, and high-pressure fields.
Why is it significant?
- The APM prices, which were being determined according to the 2014 New Domestic Gas Pricing Guidelines till now, came with several limitations:
- Significant time lag of 6-9 months
- Contained high level of volatility
- 2 of the 4 international hubs have lost relevance
- These shortcomings led to situations when the APM prices were much below the cost of gas productions (like in October 2020 and September 2021). In other instances, the APM prices shot up significantly, throwing sectors like power, fertilizers and city gas distribution into distress- like in October 2022.
- The reforms are expected to protect Indian consumers from extreme price volatility. The move comes when the CNG and PNG prices increased by 80% in the past few months in the global market.
- It has made gas cheaper for Indian consumers:
- The average cost of cooking gas (PNG) has come down by 10%.
- CNG vehicle owners have realized a 6-7% reduction in CNG prices.
- It will cut down fertilizer subsidies. This is especially significant as the fertilizer subsidies are expected to cross 2,000 crore/ year.
- It will provide clarity to aid plans of capex investments in the sectors that depend on gas.
- It is expected to promote more investment and innovation in the exploration and production activities.
What is the way ahead?
- The recent moves are aimed at shielding the Indian consumers from the high price volatility and to encourage a higher share of natural gas in the Indian energy mix.
- For years, ONGC and OIL have been petitioning the government to increase the floor price as the two entities have been selling gas at a loss for long. At the same time, gas consumers have been urging the government to ensure gas affordability. The new pricing policy attempts to balance the two demands.
- Though APM gas from legacy fields currently constitute 2/3rd of total production in India, the production from difficult areas are expected to increase their share in the next few years. Given these fields’ complexity, they are expected to remain outside the ambit of the new pricing policy.
- One of the key recommendations of the Kirit Parikh Committee that hasn’t been included in the new policy is the call for complete liberalization of APM gas prices by 2027. This requires further consideration.
With the increasing demand for natural gas, India is on its way to realize a gas-based economy- one of its energy transition goals. However, the price volatility has been a major impediment in natural gas adoption. The new pricing policy is expected to improve the situation.
Practice Question for Mains:
How is gas priced in India? How will the new gas pricing policy change things? (250 words)