Panel lays road map for freedom in gas pricing

What’s in today’s article?

• Gas Pricing (Mechanism, Review, Criticism, etc.)
• News Summary (Kirit Parikh Committee’s recommendations)

 

Why in News?

• The Kirit Parikh Committee, which was set up by the government to review the gas pricing formula, has submitted its recommendations to the Ministry of Petroleum and Natural Gas (MOP&NG).

 

What is the procedure for gas pricing in India?

• Much of the natural gas being produced in the country does not command a market-determined price — that is, it is not determined by buyers and sellers based on demand-supply dynamics in the market.
• Rather, a formula is used to fix the price of the fuel every six months.
• As per this formula, the domestic gas price is the weighted average price of four global benchmarks —
  • US-based Henry Hub,
  • Canada-based Alberta gas,
  • UK-based NBP, and
  • Russian gas.
• The domestic price is based on the prices of these international benchmarks in the prior year, and kicks in with a quarter’s lag. It applies for six months.
• So, the price applicable from April 1 to September 30, 2022 is based on benchmark prices from January to December 2021.

 

Evaluation of Gas Pricing Formula

• This formula-based pricing has some interesting features and outcomes.
• One, the formula has no mention about gas actually imported into India. Typically, gas imported in Asian markets is costlier than many international benchmarks.
  • In effect, the price of domestic gas is lower than that of gas imports.
• Second, the averaging of benchmark prices over the past year and then the time lag of a quarter mean that the domestic gas price movement is often out of sync with what’s really happening on the ground.

 

What is the criticism of gas pricing formula?

• Domestic gas prices have been rising in the past couple of years but thanks to the formula, they are still cheaper than imported gas.
• Now, this acts as a disincentive to local producers such as ONGC, Oil India, and Reliance Industries who often find that the price is not worth their time and effort to increase output.
• This eventually leads to increased gas imports at higher prices.

 

Gas Pricing Formula Review

• What India needs to do to have a mature gas market is to review is its existing formula.
• The argument put forth is that the formula is based on markets which are either very matured or are themselves producers and not exactly India-specific.
• India has set the target to raise share of natural gas in energy mix to 15 per cent by 2030, and to attain this, the entire eco-system needs to be addressed.

 

India’s growing gas import dependency

• India is the world’s second-largest gas importer. It sources roughly half of its needs from foreign suppliers, primarily from West Asian producers in Saudi Arabia, Qatar, Oman and Kuwait.
• Over the years, India’s import dependency for natural gas has steadily risen and now is inching towards 50 per cent.
• The consumption of Liquefied petroleum gas (LPG) rose sharply after the Pradhan Mantri Ujjwala Yojana (PMUY) was launched in 2016.

 

 News Summary:

• In September, the government constituted the committee, led by energy expert Kirit Parikh, to review the gas pricing formula for gas produced in the country with the aim to ensure a fair price even as global prices for gas remained high.
• The committee has submitted its recommendations to the Ministry of Petroleum and Natural Gas (MOP&NG).

 

What are the major recommendations of the Kirit Parikh Committee?

Image Caption: Recommendation of Kirit Parikh Committee

• The committee has recommended a price band of $4-6.50/unit for gas from old legacy fields, which account for over 70 per cent of the domestic output.
  • A price band will ensure a predictable pricing regime for producers and protect consumers by moderating CNG and PNG price spikes.
    • State run ONGC and OIL largely operate legacy fields in the country.
• The panel had suggested linking the price of gas produced by state-owned firms from fields given to them on a nomination basis to imported crude oil prices rather than benchmarking them to gas rates in international market
• The committee has proposed abolishing formula-based gas pricing and implementing fully market-determined rates by January 2027.
• It also suggested including natural gas in the one-nation-one-tax regime of GST.
  • It can be done by subsuming excise duty charged by the central government and varying rates of VAT levied by state governments.
• To address state concern of loss of revenue, the panel was in favour of setting up a mechanism similar to the compensation cess regime.
  • This regime made good for any revenue loss that states incurred by way of giving their right to levy VAT and other taxes on goods and services in first five years of implementation of GST regime from July 1, 2017.
• Also, the panel was in favour of moderation in rates of excise duty.

 

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What is the composition of natural gas?

Natural gas is composed almost entirely of methane although it does contain small amounts of other gases--ethane, propane, butane, and pentane. Methane is composed of a molecule of one carbon atom and four hydrogen atoms.

 

Where is natural gas found in India?

Natural Gas in India is mainly found in Gulf of Kutch, Gulf of Khambhat, Bassein field, Bombay High, Barmer in Rajasthan, Krishna Godavari basin, Cuddalore district of Tamil Nadu, Odisha, Assam, Tripura, etc.

 

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