Review of Gas Pricing Formula

• 08 Sep 2022

For Prelims: Current Mechanism of Gas Pricing Formula, Russia-Ukraine, Inflation

For Mains: Review of Gas Pricing Formula

Why in News?

The Ministry of Petroleum and Natural Gas has set up a committee under noted energy expert Kirit Parikh to review the current pricing formula for domestically-produced gas.

What is the Need to revisit the Gas-Pricing Formula?

• High Prices:
  • Local gas prices are at a record high due to the surge in global prices because of the ongoing Russia-Ukraine conflict and are expected to rise further.
  • Skyrocketing global natural gas prices lifting energy and industrial costs and derailing the efforts to contain inflation are raising concerns.
    • The country has been battling inflation above the Reserve Bank of India's tolerance band of 2%-6% for seven consecutive months.
• Current Formula is Myopic:
  • The current formula is “myopic” and does not incentivise gas producers.
  • In India, gas penetration in its energy mix is 6% as against a global average of 23%.
  • The objective is to improve this number to 15% over the next few years.
• Underpricing Penalizes the Producers:
  • India’s gas price is determined at an average price of LNG imports into India and benchmark global gas rates.
  • India is simply underpricing a scarce resource.
  • At current prices, the producer is penalised and somehow the consumer trumps the producer.

What is the Scenario of Gas Market in India?

• Total consumption in India is 175 million standard cubic meters a day (MMSCMD).
  • Of this 93 MMCMD is met through domestic production and 82 MMSCMD through LNG imports. Gas consumption is directly linked to supply availability.
• Of natural gas consumed in the country, almost 50% is imported LNG.
• Fertiliser sector is the largest consumer of gas, accounting for a third of the consumption, followed by city gas distribution or CGD (23%), power (13%), refineries (8%) and petrochemicals (2%).
• The industry fears that the world’s third largest energy consumer could see its natural gas consumption decline from the current levels if LNG (imported gas) prices in the international market continue to rule in the range of USD 45 an mmBtu (Metric Million British Thermal Unit).

What is the Current Gas Pricing in India?

• About:
  • Gas priced under APM (Administered Price Mechanism) is set by the Government of India.
    • Under this system, the oil and gas sector are controlled at four stages viz. production, refining, distribution and marketing.
  • Non-APM or Free Market Gas is further divided into two categories, namely, domestically produced gas from Joint Venture fields and imported LNG.
    • The pricing of JV gas is governed in terms of the PSC (Production Sharing Contract) provisions.
    • While the price of LNG under term contracts is governed by the SPA (Sale and Purchase Agreement) between the LNG seller and the buyer, the spot cargoes are purchased on mutually agreeable commercial terms.
  • Further, there is differential pricing existing for different sectors. Subsidized sectors such as power and fertilizer get relatively less prices as compared to other sectors.
  • Also, region specific pricing exists in the country with North Eastern states getting gas at relatively cheaper prices as compared to other parts of the country.
    • Pricing of a major share of gas supplies in the Indian market is controlled and is not market driven as government approval is required before changing the price.
• Issues:
  • Controlled pricing may result in disincentivizing investments in the sector in terms of limited participation from foreign players, who have access to technology, much required in deep-water E&P activities.
  • Also, controlled pricing hampers the competitiveness of consumer sectors (power/ fertilizer/ domestic) to compete with global energy markets as it leads to low investments in energy efficiency on the demand side.

Way Forward

• As multiple pricing regimes exist in the country, pooling of gas from different sources has been deliberated by the policy makers.
• A sectoral pool was being considered with separate pools of power and fertilizer customers. Separate pools were considered in view of avoiding cross subsidies between the customer groups and related administrative issues arising.
• Rangarajan Committee has suggested a uniform gas-pricing, at ‘unbiased arms-length’.
• The formula of domestic gas pricing should be 12-month trailing average of volume-weighted average at well-head (on net-back basis) for gas imports and volume-weighted average of US Henry Hub, UK NBP and Japanese Crude Cocktail prices.

Source: HT