Dealing with the challenges faced by players in the natural gas sector — producers, transporters and buyers — is like the chicken and egg story. Shouldn’t the focus first have been on sourcing of the blue fuel — gas — then laying infrastructure, and thereafter fixing the pricing?
The capacities to ferry this gas for use as auto fuel (compressed natural gas) and cooking fuel (piped natural gas) are far more than the supply of the main feedstock. There are demands from gas based power projects as well, and the fertiliser sector too has claims on this fuel.
Gas demand is directly linked to availability of the fuel. The total volume consumed in the country is 170 million standard cubic metre per day, and almost 50 per cent of this is imported.
But a critical issue is pricing for all the stakeholders — producers,policymakers and consumers. The prevailing spot price of gas is $33-35 per million British thermal Unit (mBtu; gas is measured in this unit). Contracted gas from the US is bought at $12 per mBtu, and Qatari gas is available at $11-12 per mBtu. The domestic gas produced from difficult areas costs $12.46 per mBtu, and Administrative Price Mechanism (APM)/non-APM gas is priced at $8.57 per mBtu.
To put in place a fair price system for gas, the government, in August this year, had constituted an expert committee under the chairmanship of Kirit Parikh. The remit of the committee was to critically examine and review the current domestic natural gas pricing regime, including pricing freedom for the gas to be produced from discoveries in deep water, ultra deep water and high-pressure high-temperature areas, issues related to ensuring fair price to the end-consumer and to suggest market-oriented, transparent and reliable pricing.
The committee submitted its report on November 30, recommending, among others, a change in the formula for pricing of gas produced from nomination fields (APM gas) to make it more market oriented, and removal of ceiling price for gas from high pressure-high temperature areas from a specified date.
It has also recommended that the APM price should be maintained between a floor and ceiling for domestic consumers. It has proposed a period after which the pricing will be market determined. As is the case with all such committee reports, this too is under consideration of the government.
But if one combs through some of the key recommendations of the committee, certain suggestions stand out: yet again, the recommendation is to derive price through a formula; it also continues with differential pricing for gas produced from nomination areas (APM), difficult area (high pressure-high temperature) and contracts; focus is on city gas distribution networks (CNG and PNG players); and subsidy compensation for selling below the market price is being proposed for both the public and private sectors. So, where does this leave the sector?
According to Vivek Rae, Chairman of Hindustan Oil Exploration Company (HOEC) and former Petroleum Secretary, the Parikh committee recommendations on gas pricing are an improvement on the 2014 formula but tilted in favour of continued subsidy for city gas entities, which is untargeted and unsustainable.
Indiscriminate grant of city gas distribution licences over the last few years assuming assured supply of subsidised gas is a questionable and unviable strategy, Rae said, adding that “the upper band of the gas price should not be artificially suppressed, and should reflect the ‘opportunity cost’ of gas for the Indian economy. This the Parikh committee has failed to do.”
A suppressed APM price will distort the market, most stakeholders in the industry feel.
Besides, APM gas is currently sold through an allocation policy, which the committee said may continue with the highest priority being given to CNG (transport) and PNG (domestic) sectors. However, the government may consider a staggered plan for exiting from APM gas allocation, on the lines of its exit from crude oil allocation, which was done from October 1, 2022, onwards.
But for complete marketing and pricing freedom the committee said, “...as the pricing and marketing freedom go hand in hand, accordingly this exit may be considered when the conditions are ripe and government need not handhold the priority sectors. Similarly, while maintaining commitment to the priority sectors, the government may get the whole allocation process examined de novo vis-a-vis gas grid availability, current situation of the industrial and commercial consumers whose allocation orders have been quite old, etc.”
According to the committee, the price of APM and other gas whose prices are set by government should be fully deregulated ideally by January 1, 2027, if the gas price volatility on the international market has moderated. For gas produced under the marketing and pricing freedom regime of 2016 for deep water, ultra deep water, high pressure-high temperature areas, the committee is of the view that ceiling prices serve little purpose and should be discontinued.
While the government’s intent is to make the price more consumer-friendly, the suggestions by the committee is titled more towards city gas distribution entities as they have been given freedom to decide on the price. Also, who will regulate this price? Right now, there is no entity to do so.
Should the government not think of empowering an authority like the Petroleum and Natural Gas Regulatory Board (PNGRB), on the lines of the State Electricity Authority, to regulate gas price also? For the market to mature and grow, it is important to have a smooth transition to marketing and pricing freedom for all sources of gas. Piecemeal attempts won’t work.
For the market to mature and grow, it is important to have a smooth transition to marketing and pricing freedom for all sources of gas.