Revised Domestic Gas Pricing Guidelines

What’s in today’s article?

• Why in news?
• What was the Existing Gas Pricing mechanism in India?
• What are the Criticisms of the existing Formula?
• News Summary: Govt Approves Revised Domestic Gas Pricing Guidelines
• What are the changes to the pricing mechanism?
• What are the Significances of new changes?

 

Why in news?

• The Union Cabinet has approved revised domestic gas pricing guidelines. The price of natural gas will be 10 per cent of the monthly average of the Indian crude basket.

 

What was the Existing Gas Pricing mechanism 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, as per the 2014 guidelines, 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.

 

What are the Criticisms of the existing 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 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.

 

News Summary: Govt Approves Revised Domestic Gas Pricing Guidelines

• The Union Cabinet approved significant changes in the pricing regime for domestic natural gas under the ambit of the administered price mechanism (APM).
  • Under the APM, the Indian government sets the price of natural gas produced by oil and gas companies.
  • The price of APM gas, which accounts for about two-thirds of India’s natural gas production, has been determined as per the ‘modified’ Rangarajan formula since November 1, 2014.
• These changes will mainly apply to gas produced by legacy fields, or nomination fields, of national oil companies Oil and Natural Gas Corporation (ONGC) Ltd and Oil India Ltd (OIL).
  • Nomination fields are acreages that the government awarded to ONGC and OIL before 1999, after which auctions became the basis of awarding oil and gas blocks.

 

What are the changes to the pricing mechanism?

• New Pricing mechanism based on recommendations of Kirit Parikh Panel
  • The revised pricing mechanism is based on recommendations of a panel headed by Kirit Parikh.
  • The panel was constituted in September 2022 to:
    • delve into the extant gas pricing guidelines;
    • recommend changes to balance the interests of gas consumers and producers;
    • help India achieve its aim of increasing domestic gas output and substantially increasing the share of natural gas in the country’s energy mix.
• Natural gas from legacy fields will be indexed to crude oil price
  • The natural gas produced from legacy or old fields will now be indexed to the crude oil price as opposed to pricing it based on gas prices in surplus nations such as the United States, Canada and Russia.
  • The price of such natural gas shall be 10 per cent of the monthly average of Indian Crude Basket and shall be notified on a monthly basis.
• For Gas produced from Nomination fields
  • The gas produced by ONGC and OIL from their nomination blocks and the administered price mechanism (APM) shall be subject to a floor and a ceiling.
    • It will have a floor price of $4/ mBtu and a ceiling of $6.5/ mBtu.
  • However, the gas produced from new wells or well interventions in the nomination fields of ONGC and OIL would be allowed a premium of 20 per cent over the APM price.
    • New wells are drilled in areas where oil and gas reserves are known or suspected to exist but have not yet been developed.
    • Well interventions, on the other hand, involve various techniques that are used to increase the productivity of existing wells.
• No revision in the ceiling price for two years
  • There shall be no revision in the ceiling price for two years, after which the cap will increase by 25 cents per year.
• No change in pricing formula for gas from difficult blocks
  • The changes in pricing formula for domestic APM gas do not apply to gas production from difficult acreages — deep water, ultra-deep water, high-temperature, and high-pressure fields.

 

What are the Significances of new changes?

• APM gas price prices linked to crude oil prices
  • The new regime will have the APM gas price prices linked to crude oil prices.
    • This has now become the prevalent practice in most natural gas contracts internationally.
  • It is more relevant to India’s consumption basket, and has deeper liquidity in global trading markets on a real-time basis.
• Addressed the issue of time lag
  • With the changes in the pricing formula, data of the Indian crude basket price from the previous month would form the basis for APM gas price determination.
• Attempt to balance demands of consumers as well as producers
  • Over the past few years, ONGC and OIL had been petitioning the government for a floor price as they were forced to sell gas at a loss for a prolonged period when prices sustained below their cost of production.
  • On the other hand, gas consuming industries had been urging the government to ensure affordability of domestic natural gas.
  • Hence, by bringing ceiling and floor price, it attempts to bring a balance.
• Significant decrease in prices of PNG and CNG
  • The reforms will lead to a significant decrease in prices of Piped Natural Gas (PNG) for households and Compressed Natural Gas (CNG) for transport.
  • The reduced prices shall also lower the fertilizer subsidy burden and help the domestic power sector.

 

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Q1) What is Piped Natural Gas (PNG)?

 Piped Natural Gas (PNG) is a type of natural gas that is delivered to households and businesses through a network of pipelines. Unlike compressed natural gas (CNG), which is delivered in high-pressure cylinders, PNG is supplied at a lower pressure and is delivered through a network of underground pipelines.

 

Q2) What is US-based Henry Hub?

 The Henry Hub is an important benchmark for natural gas prices in North America, and it is used as a reference point for futures contracts traded on the New York Mercantile Exchange (NYMEX). The prices quoted at the Henry Hub are considered the standard for natural gas prices in the United States and are used as a basis for pricing natural gas contracts in other regions.

 

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Source: Changes in domestic gas pricing formula: Math, rationale, and how consumers are affected | WION | Indian Express