The recommendations of the Kirit Parikh committee on gas pricing have given rise to some unnecessary misgivings. Before allaying these misgivings, I summarise the main recommendations of the Parikh committee for natural gas pricing reforms.

* The price of APM (administered Price Mechanism) gas, i.e. gas produced by public sector companies, ONGC and OIL, which were allotted the gas fields without any competitive bidding, should be within a floor price and a celling price. The floor price of $4/MMBTU would cover at least the marginal cost of production of gas by ONGC and OIL. The ceiling price of $6.5/MMBTU was fixed so that it will remain below the cost of regassified imported LNG.

* The price of APM gas is to be fixed based on the average cost of import of Indian crude oil in the previous month with a slope of 10 per cent subject to the floor and ceiling prices. Thus if the import price was US$70/barrel, the gas price should be $7/MMBTU. Since this exceeds the ceiling price, APM gas price will be fixed at the ceiling price.

* There are other fields given through bidding with different pricing regimes, some with cost sharing, some profit sharing and some product sharing. Producers from these fields are free to set the price of gas within a ceiling price that the government revises every six months. The committee had recommended that this limit be removed from January 1, 2026. The reason for delaying the removal was that many contracts are linked to it and that a sudden removal will cause disruption and legal tangles. In fact, such a delay was argued for by the gas producers.

Critics are wrong

A number of questions have been raised with respect to these recommendations. I shall spell them out and answer them:

* Why revise APM prices when the world market price of gas has come down to $2/MMBTU at the Henry hub in USA?

The APM price was $8.57/MMBTU and the revision brought it down to $6.5/MMBTU, which reduced the price for PNG (piped Natural Gas supplied to households) and CNG (Compressed Natural Gas for transport) users by 8-10 per cent. If the APM pricing mechanism was not revised in April 2023, the price of APM gas would have been $9.16/MMBTU.

It is untenable to argue that price should not have been revised and on the other hand, object to lower price for PNG and CNG users!

* Some critics are intrigued by the floor price of $4 and ceiling price of $6.5 for APM gas and also ask why it is applicable to only APM gas.

The reason for treating APM gas differently is that they do not have any cost, profit or production sharing obligations as the other gas producers. The reason for the floor of $4 is that it will cover the marginal cost of production of gas by ONGC and OIL. The ceiling price of $6.5 is fixed because it will be lower than the cost of landed and regassified imported LNG even when the price of gas on the international market falls to $2. Since 2017-18, the import price of LNG has not fallen below $6/MMBTU.

* Some also question the price of $12.12/MMBTU set for difficult fields as this is only marginally below the well head price in the previous six months. They do not seem to have appreciated that the price is only a ceiling and if gas can be imported at a lower cost the domestic producers cannot charge a price above it.

* Also the linking of APM gas price to average price of imported crude in the previous month is questioned.

The reason for this linkage is that the main alternative fuels of PNG and CNG users are LPG (liquefied petroleum gas) and diesel, respectively. The linkage assures that the consumers of PNG and CNG will find gas price to be economically attractive compared with their alternatives.

The APM gas pricing mechanism was changed because the earlier formula that linked APM gas producer price to the weighted average price of international hubs in US, Canada, Europe and Russia, led to some anomalies. For example, the price from October 20 to September 21 was $1.79, way below the marginal cost of production of ONGC and OIL. Also in a competitive and efficient market the consumer prices of domestic gas and imported gas should be equalised and not producer prices. The upper ceiling of $6.5 is also based on long-term cost of Indian crude imports over many years.

Road ahead

Finally, there have been questions as how these policies will lead to government’s target of having 15 per cent share of gas in the country’s energy basket by 2030 from 6.5 per cent today. Even today our import of gas constitutes 45-50 per cent of consumption. Thus we need to increase domestic production from existing fields as well as from new fields.

The removal of ceiling price and complete pricing and marketing freedom by January 1, 2027 as recommended by the committee would create incentives to invest in E&P (exploration and production). While the government has delayed decision on this recommendation, it has provided incentive of 20 per cent price premium to ONGC and OIL for increasing production from their non-APM fields.

Also, to reach the government’s target it is necessary to increase domestic demand. The demand for PNG and CNG can contribute to this. The suggested pricing will ensure healthy growth in this demand. To increase demand for the power sector in the face of dramatic cost reductions of solar power and battery technologies and net zero target of 2070, gas price would have to fall significantly.

I have described the rationale of the Parikh committee suggestions and none of the comments made by the critics are persuasive.

The writer is Chairman, IRADe, and head of the committee set up to review gas pricing formula

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