Get the price right: Proposed Changes in Gas Pricing fail to adequately address the needs of the consumer

Why in News?

• Despite the Covid-19 pandemic and the Ukraine war, India has witnessed rapid growth while maintaining fiscal stability and pursuing wide-ranging reforms.
• However, the energy sector seems to be dragging India behind from realising a threshold level of prosperity for all.
• To address the problem, the government modified the 2014 pricing mechanism for domestically produced natural gas. But the proposed changes fail to address the needs of the consumer.

 

India's share in global energy consumption

• India’s per capita commercial energy consumption has remained around a third of the global average at par with sub-Saharan levels.
• India accounts for just under 6 per cent of global commercial energy consumption.
• It consumes under 23 per cent of the commercial energy consumed by China in both absolute and per capita terms.
• India’s share of global gas consumption is just 1.5 per cent and gas accounts for only 6.3 per cent of India’s commercial energy basket.
• The 2014 pricing guidelines provided for declaration for domestic gas prices for a 6-month period based on the volume weighted prices prevailing at four gas trading hubs –
  • Henry Hub, Albena, National Balancing Point (UK), and
  • Russia for a period of 12 months and a time lag of a quarter.
• The earlier guidelines based on 4 gas hubs had a significant time lag and very high volatility.
• In order to rationalise and reform the pricing mechanism, raise the share of gas in energy mix and to achieve a 15 per cent share by 2030, India has proposed some changes to existing gas pricing rules.   

 

Proposed changes in revised gas pricing guidelines

• Now, domestic gas price, instead of international hub gas price, has been linked to imported crude, which will be 10% of international price of Indian crude basket.
• The floor price has been set at $4/mmBtu (Metric Million British Thermal Unit), and the ceiling has been fixed at $6.50/mmBtu.
• The prices will be reset every month,and these gas pricing norms will continue for two years, instead of six months as per the current practice.
• The new guidelines are intended to ensure stable pricing regime for domestic gas consumers while at the same time providing adequate protection to producers from adverse market fluctuation with incentives for enhancing production.

 

Problems with proposed changes

• Proposed changes deny Indian consumers the benefit of falling prices.
  • Natural Gas and LNG prices have fallen by 70 per cent
  • The current Henry Hub price for natural gas is just above 2$/MMBTU after briefly falling below the $2 threshold which resulted in yielding well-head price in the $1.50-$1.60 range for natural gas in the US.
  • Surplus Russian natural gas is seeking buyers.
  • And spot LNG is trading well below $13/MMBTU.
• Changes proposed do not impact the pricing of gas from the now so-called “difficult” KG Basin fields
  • As per the March 31 notification wellhead price of $12.12/MMBTU for these “difficult” fields for the six-month period April 2023-September 2023 remains intact.
  • This price is only marginally below the wellhead price of $12.46/MMBTU paid for natural gas from these “difficult” fields in the previous six-month period ending March 31, 2023.
• Linking the well-head price of natural gas to crude oil
  • Such a linkage is followed worldwide for pricing LNG, with an appropriate floor and a ceiling price.
  • Again, while adopting this pricing technique for natural gas at the well-head, the order fixes the said price at 10 per cent of the Indian crude basket even though the energy equivalent of natural gas is 17.2 per cent of crude.
• Different formulation for same commodity
  • For the KG Basin fields, the price is capped at the full energy equivalent of alternate imported fuels. The logic behind this differential treatment and the magnitude of the difference imposed remains unclear.
  • The floor and the ceiling price for domestic natural gas is applicable only to the gas produced from the nominated fields of ONGC/OIL and not to all natural gas fields covered by government-administered prices.
  • The nominated fields of ONGC/OIL that are subject to a floor price and a ceiling price will be eligible for an arbitrary 20 per cent premium for natural gas produced from “new wells” or through “well intervention”.
  • In addition, after April 1, 2025, the ceiling price for such nominated fields will be raised by an arbitrary $0.25/annum. The reasoning for these arbitrary provisions, applied selectively to certain fields, also remains unclear.
• Different formulations for the same commodity will create winners and losers on a non-level playing field.
• In such situations,the consumer is always the ultimate loser.

 

Conclusion

• The proposed pricing changes do not seem to fulfil two key objectives; One, India’s dire energy poverty and, two, promoting a competitive gas market that delivers a share of 15 per cent to gas in India’s commercial energy basket.
• The government should emphasise developing a firm and rational system of pricing natural gas, applicable to both the public and private sectors.

 

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Q1) What will be the result of linking gas price to crude?

CNG and PNG prices will become cheaper by around 10%. 

 

Q2) What is “Well-Head” price? 

The well-head price is the exact value of a resource at the time of extraction.

 

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Source: The Indian Express