From the Viewsroom

Free up gas pricing

Anand Kalyanaraman | Updated on August 25, 2020 Published on August 25, 2020

The arbitrary formula in place disincentives domestic producers

News reports suggest that in the next price reset — applicable from October 2020 to March 2021 — domestic gas price could fall to $1.9-1.94 per mmbtu, the lowest in more than a decade. Gas consuming industries such as city gas distributors, fertiliser companies and power producers may be pleased, but this third consecutive reduction in price will further squeeze domestic hydrocarbon producers such as ONGC and Oil India; ONGC is likely to post a loss of over ₹6,000 crore in its gas business in FY 2020-21.

True, international gas prices too have been pulled down by a supply glut and demand destruction due to coronavirus. But domestic gas producers have it much worse due to the arbitrary gas-pricing formula in place. The price for much of the gas produced in India is determined by the weighted average price of four global benchmarks (the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas) in the prior year; this kicks in with a quarter’s lag and applies for six months. The formula inexplicably does not take into account the price of gas imported into India, or even into Asia where the fuel imports are typically costlier. Also, the formula is also often out of sync with ground realities, given the huge time lags. All this acts as a disincentive for domestic gas producers — translating into weak local production and higher imports. India’s gas import dependency has been rising over the years — from 34 per cent in 2013-14 to about 53 per cent in 2019-20.

Implementing an arm’s-length, market-linked pricing mechanism for domestic gas is imperative. It’s an opportune time now to free up gas pricing, given the prevalent low price environment across the market. Subsidies, if any, to user industries should be borne by the Centre and not be thrust upon gas producers. When oil prices can be market-linked, there is little reason why gas prices can’t be. This can take forward the plan of increasing the share of gas — a relatively clean fuel — in the country’s energy mix from about 6 per cent currently to 15 per cent over the next decade.

Anand Kalyanaraman Deputy Editor

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Published on August 25, 2020
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