Domestic gas price should be market-linked to spur output

| Updated on January 21, 2020

It is also essential to encourage investments in what is essentially a high-risk business

The recent criticism by the International Energy Agency of India’s natural gas pricing policy is not without merit. It reaffirms what the country’s energy policy-makers have known for long — that linking domestic prices to very low global reference prices has reduced incentives for domestic producers to raise supplies. India’s domestic gas output declined 7 per cent between 2013-14 and 2018-19, while its gas import dependency increased from 34 per cent to 47 per cent in this period. The metrics have worsened in 2019-20 with import dependency now over 50 per cent. While geological challenges have played a part in the output decline, a large portion of the blame lies at the door of the arbitrary formula-linked pricing mechanism that governs much of the natural gas being produced in the country. This formula is used to fix the price of the fuel every six months. The domestic gas price is 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, kicks in with a quarter’s lag, and applies for six months. Oddly, the formula does not take into account the price of gas actually imported into India. Typically, Asian gas imports are costlier than many international benchmarks. So, the price of domestic gas is lower than that of gas imports into India.

These factors disincentivise domestic producers. What follows is increased gas imports at higher prices to meet rising demand. To be fair, the Centre has been taking corrective steps such as giving pricing freedom under the new Hydrocarbon Exploration Licensing Policy. But output from many fields that are already producing are still subject to formula-based pricing. The Centre would do well to provide market-linked pricing freedom for gas from discovered and producing fields, too. There could be more scope to increase output quickly from these fields, if the price is right, than from new fields where there is always the risk of long delays and failure.

When oil prices in the country can be market-linked, there is no reason for gas prices to be arbitrarily determined. Price subsidies, if any, to consumer industries such as fertilisers, power and city gas distributors should be borne by the Centre, and not by gas producers. If India is to take meaningful strides to increase its share of gas in the energy mix from the current 6 per cent to the planned 15 per cent, it is imperative to ramp up domestic gas output. It is essential to encourage investments in what is essentially a high-risk business. Arm’s length, market-linked price for domestic gas could work out cheaper than imported gas due to cost savings on freight, insurance and regasification. Inclusion of domestic gas under the Goods and Services Tax (GST) will also help in making the fuel more price-competitive.

Published on January 21, 2020

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