The Kirit Parikh committee report’s suggestions on reforming natural gas pricing are timely. They come at a time when India needs to raise the share of natural gas in its energy mix from the current 6.3 per cent to 15 per cent by 2030 — for at least two reasons: first, reducing India’s dependence on imports, now at close to 50 per cent; and second, cutting the carbon intensity of its household and transport sectors, since gas is viewed as a ‘transition fuel’ in the shift from fossil fuels to renewables.
The report makes pertinent points on two broad aspects: pricing recommendations to improve output, and at a more implicit level, changes in allocation of gas produced under administered pricing in the short run, so that efficient use is encouraged. The idea is that, as the market matures over time in terms of output and number of players, the ceiling and floor prices can be done away with on the production side, with allocations towards specific sectors being gradually dispensed with as well — just this October, the government stopped the practice of allocating crude oil produced in the country.
The report says that compared to the natural gas production of 34 BCM in 2021-22, a 15 per cent share of the energy mix would amount to a requirement of 170-200 BCM by 2030. On the production side, the report rightly argues for attractive pricing, with a floor of $4 per MMBTU and a ceiling of $6.5 per MMBTU, the former based on the marginal cost of gas output by established fields and the latter the 20-year average price of the Indian basket of crude imports. Globally-benchmarked Indian prices were lower than the $4 floor between October 2015 and April 2022. Global benchmarking creates volatility issues for producers and users: prices lurched from $1.79 per MMBTU in April-September 2021 to $6.10 in the same period this year, and is set at $8.57 per MMBTU for the October 2022- March 2023 period . The first does not cover costs, while the second and third bring natural gas prices on par with diesel, petrol and LPG prices. On the user side, the report implicitly advocates that decontrol of distribution will improve resource use by the power and fertiliser sectors, which account for 34 per cent and 17 per cent of allocated ‘APM gas’ respectively. APM gas refers to output from fields assigned on nomination basis before oil exploration was liberalised in 1999. Output from these fields accounts for 60 per cent of India’s total gas output. Most of the remaining domestic gas is produced by ‘deepwater’ oilfields, where distribution is decontrolled, anyway. The report suggests that “the current APM gas allocation policy may continue with the highest priority being given to CNG (Transport) and PNG (Domestic) sectors”. This is green and energy efficient in intent.
The panel’s idea to encourage additional output in existing fields by offering a price premium of 20 per cent needs to be backed by adequate controls as it can be misused. In sum, the Committee’s recommendations have the potential to create a robust, independent market for natural gas in India.