Objective is to ensure fair price, increase share of gas in energy mix: Kirit Parikh

We have many gas fields with different pricing and policies. So, we have tried to simplify this. It was done with three objectives. First, to increase gas share in our energy mix to 15 per cent by 2030. Second, we must provide fair prices to consumers. Third, make sure prices do not affect government finances.

We have taken the APM (Administered Price mechanism) prices which apply to gas produced by ONGC and OIL from their allocated fields. In doing this, we must set a price which at least covers marginal cost of production of ONGC and OIL. We decided on $4 per mBtu (floor price). If you take out 10 per cent royalty, then ONGC will get around $3.60 per mBtu.

Second was that, currently the pricing situation is volatile globally due to the Russia conflict and it is difficult to link everything to international prices without putting a ceiling on APM. So, we put a ceiling on APM at $6.5 per mBtu, which will be increased by $0.5 per mBtu annually.

Anyway by 2027, we believe the price situation will stabilise and there will be no need for a floor and ceiling on APM prices. So, it will be market determined after January 1, 2027.

So how will the prices be determined? Well, you look at average imported prices of crude oil products and then apply a slope of 10 per cent, which means that gas price will be 10 per cent (per mBtu) of the average imported price per barrel of crude oil.

This price will be revised every month and if price is higher than the upper ceiling then it will fall in the upper ceiling and if it is lower than floor level than the lower floor will apply. So, this is the price at which GAIL will get APM gas and based on that it will provide gas to CGD (City Gas Distribution), fertiliser and other users.

Challenging fields have some pricing freedom as it is limited by an upper ceiling that we would like to remove. Currently, there are many existing contracts, which will get disturbed and lead to legal issues and market upheaval. So, we said give three years time and on January 1, 2026, this ceiling price can be removed and will become market determined.

The rationale to have market determined prices is that already fields allotted after February 2019 have this freedom. It is a critical freedom that we need to give in order to attract investors in exploration and production (E&P). It is also critical for increasing production.

Globally, LNG price is fluctuating and has become very high. What one has to also recognise is that number of terminals for LNG have come here and within two years LNG supply will increase by 25 per cent and another 20 per cent in the following year. There is likely to be a fairly softer gas market internationally.

The concern for CGD is on how this ensures a fair price to consumers. Consumers to be concerned are primarily those who are getting subsidies on LPG and whose consumption the government might want to improve due to the socially beneficial aspect behind gas. One is the PNG (Piped natural gas) in households as they should have clean cooking fuel. It serves as a substitute to LPG and the idea was to free up LPG from urban markets and be able to provide cylinders in rural areas where it will be costly to provide PNG. So CGD network is being promoted. It is important to make sure that PNG consumers get gas at a price which is comparative with LPG. The idea is that CNG vehicles will check urban pollution. So we have to make sure that CNG and PNG consumers get gas at an affordable price.

Our proposal will ensure that when we are linking the price of APM gas to the average price of imported crude oil products and that really gives an assurance that if crude oil products prices are high than gas prices will be high and if cost of crude oil is high than competitive cost of LPG and PNG will be high. Similarly, if cost of diesel oil is high than competitive cost of CNG will also be high. So one will have sufficient margin.

What is your rationale for bringing gas under GST?

Gas should certainly be brought under GST as the benefits are fairly obvious. The problem is that States which produce gas are really concerned about the loss of revenue on gas products. So we have to have a mechanism in which the government can compensate States for the losses like it was done for 5 years under GST. In between, if global prices become very high, I think the government will have to modify Excise as well.