Cabinet to consider price caps on gas to stave off rates rising to $10.7 per mmBtu

Cabinet to consider price caps on gas to evade price hike

The Union Cabinet is likely to soon consider imposing caps or a ceiling on price for majority of natural gas produced in the country to keep input costs for users ranging from CNG to fertilizer companies in check, sources said.

The government bi-annually fixes prices of locally produced natural gas — which is converted into CNG for use in automobiles, piped to household kitchens for cooking and used to generate electricity and make fertilisers. Two different formulas govern rates paid for gas produced from legacy or old fields of national oil companies like Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), and that for newer fields lying in difficult to tap areas such as deepsea. The global spurt in energy prices post Russia’s invasion of Ukraine have led to rates of locally produced gas climbing to record levels – USD 8.57 per million British thermal unit for gas from legacy or old fields and USD 12.46 per mmBtu for gas from difficult fields. These rates are due to revision on April 1.

Going by the current formula, prices of gas from legacy fields are slated to climb to USD 10.7 per mmBtu with minor changes in rates for gas from difficult fields, two sources with knowledge of the matter said. Rates of CNG and piped gas for kitchens have already jumped 70 per cent because of previous gas price hike and would climb further, if April 1 rate revision happens.

Sources said the government had last year constituted a committee under Kirit Parikh to look at revision in gas prices that balances both local consumer and producer interest, while at the same time advances the country’s cause of becoming a gas-based economy. The committee has recommended changing the indexation for gas from legacy fields to 10 per cent of prevailing Brent crude oil prices instead of current practice of using rates of gas in surplus nations to decide their price. This, however, would be subject to a floor or base price of USD 4 per mmBtu and cap or ceiling price of USD 6.50, they said.

At current Brent crude oil price of USD 75 per barrel, the price of gas should be USD 7.5 per mmBtu but the fuel would be priced only at USD 6.5 due to the cap. While leaving the formula for difficult fields unchanged, the panel suggested the price band for current production from legacy or old fields, which make up for two-thirds of all gas produced in the country and is currently under the administered price mechanism, or APM, until a full deregulation of prices is implemented in 2027.

The panel suggested a 50 cents per mmBtu increase in the USD 6.50 ceiling every year to slowly move toward the marketing and pricing freedom for APM fields. Sources said inter-ministerial consultations on the committee recommendations are over and a note for consideration of the Cabinet, largely accepting the recommendations, has been moved. The cabinet is likely to consider it soon, they said. The ceiling price covers for the cost of production of producers, while protecting consumers particularly CNG users, kitchens using piped cooking gas and fertilizer plants who had grappled with soaring input cost.

APM gas makes up for most of CNG and kitchen gas supplies. India aspires to become a gas-based economy with the share of natural gas in its primary energy mix targeted to rise to 15 per cent by 2030 from the existing level of around 6.3 per cent. APM gas fields were allotted to ONGC and OIL before 1999. Production from these fields do not attract profit-sharing with the government, and their pricing formula is benchmarked to gas prices at international gas hubs in surplus nations every six months based on the weighted average price. Prices were last revised on October 1 and are now due for revision on April 1.

To incentivize additional production from a new well or well intervention in the nomination blocks, the Kirit Parikh committee recommended a premium of 20 per cent over and above the APM prices for ONGC and OIL till complete freedom. As much as 34 per cent of APM gas is allotted to the power sector in 2021-22, 17 per cent to the fertilizer industry, which impacts food prices, and 22 per cent to the city gas sector. The committee also recommended that gas should be brought under the Goods and Services Tax, or GST, regime. Having a common taxation such as GST for gas in lieu of state level VATs, which vary from 3 per cent to as high as 24 per cent, will help develop the market.