The government made two significant changes in the revised pricing policy for domestic natural gas produced from legacy fields. One, it linked the price of natural gas to the basket of Indian crude oil instead gas prices at global hubs. Two, it introduced the concept of a price band. Legacy fields are nomination fields, blocks given under New Exploration Licensing Policy (NELP) and pre-NELP blocks. It was also decided that the price of gas, to be notified every month, will be 10 percent of the monthly average of the Indian crude basket in the preceding month and notified every month.
The shift to link the price of natural gas with the crude oil price is unwarranted as natural gas is not a replacement for crude oil. The pricing of natural gas has to be on its own, especially when 30 percent is used for urea production and 15 percent for power generation. Moreover, given the volatility in crude prices, monthly revisions in gas prices can create uncertainties for the fertiliser industry and power plants, as they cannot easily pass on the higher costs to farmers and poor households.
Relief For Consumers
This brings us to the second change – the imposition of a price band of $4-6.50 per mBtu. This was done to insulate consumers from a sharp rise in the price of gas when crude prices stay elevated. Considering the Indian basket of crude at $78.54 per barrel (the average for March 2023), 10 percent of this yields $7.85 per mBtu. Since this is higher than the cap, the price will be set at the outer bound of the band, that is, at $6.50 per mBtu.
Given that it is 24 percent lower than the current price of $8.57 per mBtu, it may appear that the government has given a big relief. This isn’t the case as a premium of 20 percent is chargeable on gas supplied from the so-called ‘new wells’ or ‘well interventions’ in the nomination fields of ONGC and OIL. The price for such supplies will be $7.8 per mBtu, which is marginally lower than the current price.
This will also pave the way for bureaucratic red tape as officials in the ministry of petroleum and natural gas (MoPNG) will have the discretion to decide how much of ONGC/OIL gas will get the premium price and the unlucky consumers who will pay for it.
The government ought to have continued with the formula it has been following since November 2014 instead of adopting the flawed linkage with crude. Under that formula, the price of natural gas price was calculated as the weighted average of prices at four global gas trading hubs, namely Henry Hub (USA), Alberta Gas (Canada), National Balancing Point (UK) and Russian Gas. Domestic prices were revised every six months under the previous formula.
The four global hubs have fairly mature gas markets and the prices obtained there are reasonable. The prices used for arriving at the weighted average were for a twelve-month period. That smoothened out the month-to-month variations and ensured that the natural gas prices charged to consumers were stable.
Gas prices had shot up in the past year due to an unprecedented situation created by the war in Ukraine, leading to a sharp increase in domestic prices. But the price would have automatically declined as and when the situation normalised. Until then, the government could have capped domestic prices.
Revision of Ceiling Price
The revision of the pricing formula is in line with the recommendations of the Kirit Parikh committee set up by the MoPNG in September 2022 to review the current pricing formula for domestic gas. Apart from linkage with crude and price band, the committee had recommended an increase of $0.5 per mBtu annually in the ceiling price for four years. The idea was to bring it up to a level closer to the market-determined price thereby facilitating a smooth transition to complete deregulation from January 1, 2027. But the government has agreed to increase the ceiling by only $0.25 per mBtu and that too after two years. It is silent on freeing up the price. In other words, it wants to continue with the administered regime for legacy gas perpetually.
For gas produced from deep/ultra-deep and high-pressure/high-temperature fields - offshore assets in the KG basin off the Andhra coast – the price was determined on the basis of competitive bidding. It is higher than the price for gas from other fields and is subject to a ceiling linked to the prices of alternate fuels including fuel oil, naphtha, and LNG. The Parikh committee wanted the ceiling to be scrapped on January 1, 2026. The government is silent on this too.
Thus, it appears that the government has put reforms in gas pricing on the back burner.
Uttam Gupta is a policy analyst. Views are personal, and do not represent the stand of this publication.
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