ONGC is reported to have sought doubling of natural gas price to bring discoveries in the Krishna Godavari basin and Gulf of Kutch to production. Without a viable price, it will have to reportedly mothball the $1.5 billion projects. The company’s demand has merit. Earlier this year, the oil minister had stated that the cost of production of natural gas in the KG basin is between $4.99 and $7.30 per mmbtu, and in the range of $3.80 to $6.59 a unit for other basins. Going by this, the current price of $2.89 a unit being offered for domestic gas is clearly a losing proposition.

Gas pricing has been a vexed problem in the country. Unlike crude oil, domestic gas price in India is not market-determined. Since November 2014, it is being determined every six months as a weighted average of four international benchmarks — US-based Henry Hub, Canada-based Alberta gas, UK-based NBP and Russian gas. Given the prolonged weakness in international gas markets, the formula has kept the domestic price subdued and far lower than the price of imported gas.

The Government has been playing safe, ostensibly to protect user industries such as fertilisers and power. But this is flawed policy. At prices much lower than that for imported gas, there is no incentive for contractors such as ONGC to scout for, or increase production domestically. Market-linked pricing is essential to encourage gas production. When oil price can be market-linked, there is little reason why gas price can’t be. It’s time to put behind the ghost of disputes such as those with Reliance Industries.

Under the Hydrocarbon Exploration Licensing Policy, pricing and marketing freedom for domestic gas is restricted to new gas production from difficult terrains. But here too, the price is subject to a ceiling-based on a formula, involving the import price of alternative fuels. The current gas price for such blocks is $6.3 a unit, which may not be commensurate with the risks involved.

Anand Kalyanaraman Senior Assistant Editor

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