The Ministry of Petroleum and Natural Gas in India has recently initiated steps to review the existing gas pricing formula, appointing energy expert Kirit Parikh to head a committee for this purpose. This step comes in light of rising inflation rates and an ongoing conflict between Russia and Ukraine that have significantly affected global prices.
Revisiting the Gas Pricing Formula – The Necessity
Since local gas prices have hit record heights due to the global surge caused by the Russia-Ukraine conflict, and are expected to rise even further, it is deemed necessary to revisit the current gas pricing formula. Increased global natural gas prices are affecting energy and industrial costs, thus thwarting efforts to contain inflation. For the past seven months, India has been grappling with inflation rates above the Reserve Bank of India’s tolerance limit of 2%-6%.
Furthermore, the existing formula is criticized as being myopic because it does not provide adequate incentives for gas producers. Currently, the gas penetration rate in India’s energy mix stands at 6%, against a global average of 23%, revealing a need to boost this ratio to 15% over the coming years.
Issues with Current Pricing – Underpricing and its Consequences
India’s gas price is determined by averaging the price of LNG imports into India and global benchmark gas rates, which leads to potential underpricing of this scarce resource. At present, the producer often suffers from this setup, and the consumer gains an undue advantage.
The Indian Gas Market Scenario
India’s total gas consumption is around 175 million standard cubic meters per day (MMSCMD), with domestic production covering 93 MMSCMD and LNG imports making up the remaining 82 MMSCMD. Almost half of the natural gas consumed in India is imported LNG. The fertilizer sector is the top consumer, followed by city gas distribution (CGD), power, refineries, and petrochemicals.
Current Gas Pricing Strategies in India
Gas prices under the Administered Price Mechanism (APM) are set by the government, with controls placed at four stages: production, refining, distribution, and marketing. Non-APM or Free Market Gas is split into domestically produced gas from Joint Venture fields and imported LNG. Different sectors receive different prices, with subsidized sectors like power and fertilizer often paying less. There’s also region-specific pricing, with the North Eastern states usually getting gas at cheaper rates.
The Effect of Controlled Pricing
Controlled pricing can disincentivize investments, as it may limit participation from foreign players who have access to superior technology needed for deep-water E&P activities. It can also harm the competitiveness of consumer sectors when compared to global energy markets due to reduced investments in energy efficiency.
Potential Solutions and Way Forward
To address the issue of multiple pricing regimes, policymakers have considered pooling gas from various sources. A sectoral pool for power and fertilizer customers, for instance, has been contemplated to avoid cross-subsidies and administrative issues. The Rangarajan Committee suggested a uniform gas pricing with a 12-month trailing average of volume-weighted averages for gas imports and US Henry Hub, UK NBP, and Japanese Crude Cocktail prices.
Last Modified: February 18, 2024