Holes in the gas market

On January 5, Prime Minister Narendra Modi said, “…Since 2014, we have brought in various reforms across the oil and gas sector. These reforms cover exploration and production, natural gas, marketing and distribution. We plan to achieve 'One Nation One Gas Grid.' We also want to shift to a gas-based economy. The use of natural gas has several environmental benefits. The government is taking policy initiatives to increase the share of natural gas in India’s energy basket from 6 per cent to 15 per cent.”

Today, the natural gas pricing in the country is distorted, despite the government making attempts to streamline it by promising marketing freedom. Gas price in India, as is the case with auto fuel price, is controlled artificially putting domestic gas producers at a disadvantage vis-à-vis prices in the global market.

Gas in India is sold at four different price points — $1.79 a unit (gas is measured in million British thermal units) is the administered price, $4.5-5.5 a unit from production-sharing contracts and joint ventures, spot price is at about $18 a unit, and long-term imported gas contract is $6-7 a unit. These are the landed cost. At the retail end, added to the price are marketing margins, transportation costs, local taxes and levies.

Gas demand is directly linked to supply. Today, 89 mmscmd of total demand is met from domestic production and 101 mmscmd from imports.

Though the government has allowed pricing freedom for future discoveries or those which came on stream from February 2019 onwards, it has put a cap on the price, which it announces every six months. The cap is $4.06/unit for production from discoveries in deepwater, ultra deepwater and high pressure-high temperature areas. In fact, the first to fall under this free price regime was Reliance Industries and its partner BP’s Krishna Godavari Basin gas. But they cannot sell higher than the capped price, though what they have discovered through open market auction was higher.

For a successful shift to a gas-based economy, it is also important to allow the market to mature, and, for that, this price distortion must be corrected.