The Kirit Parikh committee, which was set up by the government to review the pricing formula for gas produced in the country as global energy prices soared, has recommended complete liberalisation of natural gas prices by January 1, 2027.
The government-appointed panel, which submitted its report on Wednesday, November 30, has recommended a floor price and a cap for gas from legacy and old fields. For gas produced from difficult fields, which enjoy more freedom in pricing albeit with an upper limit, the committee has recommended that the policy should be left unchanged for the next three years.
“The whole idea to do all this is that we wanted to make sure that the government’s target of 15 percent of gas in the Indian economy by 2030 has a chance of fulfilment. That requires that we produce a lot of domestic gas. Currently, only 6 percent of our total energy is from gas and we are importing 50 percent of gas,” Parikh told CNBC-TV18.
In September, the government constituted the committee, led by energy expert and former Planning Commission (since renamed NITI Aayog) member Kirit Parikh, to review the gas pricing formula for gas produced domestically with the aim to ensure a fair price even as global prices for gas remained high.
Here’s all you need to know:
What are the key recommendations and what is the impact?
Recommendation: Domestic gas produced from legacy and old fields which is priced on the basis of the Administered Pricing Mechanism (APM) will have a floor of $4 per metric million British thermal units (mmBtu) and a cap of $6.50 per mmBtu. The cap will rise by $0.50 every year.
Impact: This recommendation, if approved, will govern pricing of gas produced by state-run Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL).
Recommendation: Deregulation of APM gas pricing by January 2027.
Impact: While this recommendation is in line with the industry demand for market-determined pricing for gas to boost production, allowing five years for it to be implemented will be in the interests of both consumers and producers of gas and protect them from the volatility in the global market.
Recommendation: The committee recommended no change pricing mechanism for gas produced from new and difficult fields. New and difficult fields enjoy pricing freedom to compensate for the greater risk and cost involved in these projects but they have a pricing cap. The report suggests that the upper cap should be removed from January 1, 2026.
Impact: The likely removal of cap would be positive for gas produced from fields like the Krishna-Godavari block D6 (KG-D6) fields of Reliance Industries Ltd and its joint venture partner bp plc, which are governed by the pricing formula for difficult fields. The removal of the cap may lure more investments into these challenging fields.
Recommendation: Domestic gas prices change should be linked to crude prices as against the current practice of linking it to global benchmarks of the US (WTI), UK (Brent), and Canada (CCI).
Impact: If accepted by the government, this could reduce the sharp movements in prices that have been witnessed recently due to geopolitical developments.
Recommendation: City gas distribution (CGD) and fertiliser sectors will continue to get priority in gas allocation. Currently, CGD firms get about 90 percent of the gas allotted to priority sectors (CNG + PNG domestic)
Impact: Brokerage Prabhudas Lilladher said that if approved, CGD companies like Indraprastha Gas Ltd and Mahanagar Gas Ltd will benefit the most as the priority sector accounts for over 80 percent of revenues. “At a cap price of 6.5/mmBtu (currently $8.57), retail CNG prices could be down Rs7-8/kg,” the brokerage said.
What went behind these recommendations?
The committee had taken suggestions from all stakeholders and deliberated over them.
“We have listened to all stakeholders and considered their concerns. And we have tried to balance them in the sense that we give all producers adequate returns, distributors adequate margin and the consumer a fair price. We didn’t want to increase any burden on the government,” said Parikh.
What next?
The committee has submitted its recommendations to the Ministry of Petroleum and Natural Gas. If the ministry approves it, the proposals will be sent to the cabinet for its nod, which is required for implementation of the policy.
Prashant Vasisht, vice-president and co-head, corporate ratings, ICRA Ltd, said, “The reduction in gas price should result in a cut in CNG and PNG (domestic) prices by the CGD players and would improve the conversion economics for the end consumer, thereby stimulating demand. Lower domestic gas prices would also reduce GoI’s subsidy burden for the fertiliser sector. Also, lower domestic gas prices would lead to a more competitive cost of generation for the domestic gas-based power generation projects. Inclusion of natural gas under GST (goods and services tax) would reduce the incidence of stranded taxes.”
Industry is hopeful that the government would bring natural gas under the GST regime to boost domestic production.
Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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