Gas pricing: New formula, old controls
The decision of the Union Government to grant a 20 per cent premium over the price determined by the Administered Price Mechanism for any natural gas that state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) will produce from the ‘new wells’ or ‘well interventions’ from their nominated fields has made the NG pricing murkier.
India consumes 59.5 billion cubic metres (bcm) of NG annually. Nearly 54 per cent of this is produced domestically, and the balance is imported. Of the domestic gas, around two-thirds is from the so-called ‘legacy fields’; those include fields given on nomination to ONGC and OIL, those given under the New Exploration and Licensing Policy (NELP) launched in 1999, and pre-NELP stuff given to private firms.
Under guidelines effective from November 2014, supplies from these fields used to be a weighted average (WA) of prices of NG at four international locations: Henry Hub (the US), Alberta Gas (Canada), NBP (National Balancing Point, the UK), and Russian Gas. The prices used for arriving at the WA were over a twelve-month period. It was revised
every six months in a financial year.
The four global hubs have fairly mature gas markets, and the prices obtained there are reasonable. Moreover, considering that the prices for 12 consecutive months were used for arriving at the WA, it smoothed out the month-to-month variations. That system was working well, ensuring the stability and predictability of the policy environment.
On April 1, 2023, the government changed the above system based on the recommendations of the Kirit Parikh Committee (2022). Under the new formula, for any given month, the price expressed as per million British thermal units (mBtu) is arrived at by taking 10 per cent of the monthly average of the basket of Indian crude oil in the preceding month. The price is revised every month.
Given the volatility in crude prices, the adoption of this formula is bound to lead to fluctuations in the NG price, with a tendency to move north most of the time. So, the Committee prescribed a price band of $4–$6.50 per mBtu, which the government accepted. What this means is that even when the formula-based price is higher (at the current Indian basket price of $77 per barrel, the NG price comes to $7.7 per mBtu) than the ceiling of $6.50 per mBtu, the price will be set at $6.50 per mBtu.
One wonders whether a premium of 20 per cent on supplies from ‘new wells’ and ‘well interventions’ will make any difference. Add a 20 per cent premium to $7.7 per mBtu, and we get $9.24 per mBtu. But, given the cap, the price ought to remain at $6.50 per mBtu. That will defeat the purpose of the premium. If, however, the government’s intent is to give a 20 per cent premium on the ceiling price, it makes no sense to put a cap in the first place.
The upshot is that the government wants to set the NG price at a level it chooses. The talk of a formula is just a cover-up. So, for legacy fields, it fixes the price at $6.50 per mBtu. There is another price for ‘new wells’ and ‘well interventions’ set at $6.50 per mBtu plus 20 per cent. This is at the discretion of the bureaucrat. Moreover, which fields get the benefit of interventions is also at the bureaucrat’s discretion.
Even the pricing of the remaining one-third of domestic NG supplied from the so-called deep/ultra-deep and high-pressure/high-temperature fields, mostly in the Krishna-Godavari basin off the Andhra Pradesh coast, isn’t free from ‘discretion’ and ‘arbitrariness’. Technically, though, the firms can go for competitive bidding to determine the price; this too is subject to a ceiling linked to the prices of alternate fuels, including fuel oil, naphtha, and LNG.
In 2014, Prime Minister Narendra Modi started the process of reforming gas pricing by introducing formula-based pricing for legacy gas and, in 2016, by permitting market-based pricing for supplies from difficult fields. But it has ended up exercising control over both. Meanwhile, the Kirit Parikh Committee had recommended the de-regulation of difficult gas fields’ prices by January 1, 2026, and the de-regulation of APM prices for legacy fields by January 1, 2027. But the government is silent on these recommendations. In fact, by adding more categories (read: ‘new wells’ et al), it has given a signal that an administered or controlled pricing regime for NG and attendant bureaucratic red tape is here to stay.
(The writer is a policy analyst)