Revision in the Domestic Gas Pricing Formula
Present circumstances:
- The Union Cabinet has authorised significant changes to the administered price system (APM), which primarily applies to gas produced by legacy assets or nomination fields of national oil companies Oil and Natural Gas Corporation (ONGC) Ltd. and Oil India Ltd. (OIL).
- The government awarded ONGC and OIL acreages known as “nomination fields” up until 1999, when auctions took the place of government awards of oil and gas blocks.
- Since November 1, 2014, the “modified” Rangarajan technique has been used to determine the price of APM gas, which accounts for about two-thirds of India’s natural gas output.
- As suggestions for the modified pricing technique were made by the panel under the direction of Kirit Parikh.
- In order to strike a balance between the interests of gas producers and consumers and to help India achieve its goal of increasing domestic gas output and significantly increasing the share of natural gas in the country’s energy mix, a panel was established last year to examine the current rules for gas pricing and make changes.
Significant updates to the revised pricing regimes and their effects:
- Using monthly price adjustments rather than biennial ones, and comparing the price of APM gas to the price of imported crude rather than the prices of gas in four international gas trading centres.
- The new pricing regime also establishes a floor price of $4 per million British thermal units (mBtu) and a ceiling price of $6.5 per million British thermal units (mBtu) for ONGC and OIL’s APM gas, respectively, to protect consumers from high costs while shielding the producers from being forced to record losses on gas sales.
- The new pricing structure is anticipated to result in a large decrease in the cost of piped natural gas (PNG), which is used in homes, as well as compressed natural gas (CNG), which is used as a fuel for cars.
- Additionally, it should promote gas-powered power plants and lessen the financial burden that fertiliser subsidies are placing on the government.
A new national petrol price system:
- Now, the average price of the Indian crude basket for the previous month will cost 10% higher than APM fuel. There will be monthly price modifications.
- Gas produced from the nominated fields, which are held by ONGC and OIL, will have a floor price of $4/mBtu and a ceiling price of $6.5/mBtu.
- This means that the two companies will still get a minimum of $4/mBtu even if the price of petrol as determined by the formula decreases.
- In a similar vein, the highest price they can obtain for APM petrol will be $6.5/mBtu, regardless of how high formula-based pricing increases.
- According to the modified formula, the Petroleum Planning & Analysis Cell (PPAC) of the Ministry of Petroleum & Natural Gas said on Friday that the price of domestic natural gas will be $7.92 per mBtu for the remaining days of April.
- PPAC figures show that the average price of the Indian crude basket in March was $78.54 per barrel. Nonetheless, ONGC and OIL will be paid $6.5 per mBtu.
The system for pricing gasoline has changed for the following reasons:
- The APM gas price was set for a six-month period based on the volume-weighted prices in effect at four international gas trading hubs: Henry Hub in Alberta, National Balancing Point in the UK, and Russia for a period of 12 months and a quarter lag, in accordance with the 2014 guidelines for gas pricing.
- The government asserts that “the necessity for this rationalisation and reform was felt” as a result of the former system’s high volatility and significant time lag.
- The new method will tie the price of APM gas to the price of crude oil, a practise that is presently standard in the majority of natural gas contracts worldwide, is more relevant to India’s consumption patterns, and has greater liquidity in real-time international trading markets.
- With the changes to the pricing process, the APM petrol price would be established using data from the Indian crude basket price from the previous month.
- The crude basket used in India is derived and contains 24.38 percent sweet crude oil and 75.6 percent sour crude oil. It serves as an example of the variety of crude grades that Indian refineries can handle.
The pricing structure for petrol from problematic blocks won’t change:
- The changes to the price mechanism have no impact on domestic APM gas production from difficult acreages such as deep water, ultra-deep water, high temperature, and high pressure fields.
- In 2016, a pricing regime was adopted for gasoline coming from problematic blocks, including KG-D6 owned by BP, Reliance Industries, and KG-DWN-98/2 owned by ONGC. This pricing regime allowed for marketing and pricing freedom subject to a ceiling price. Every six months, the ceiling price for difficult fields was revised in conjunction with the APM petrol price increase.
Parikh panel’s suggestions:
- Although not all of the Parikh committee’s key recommendations were carried out, they formed the basis for the current domestic petrol pricing system.
- The government accepted the panel’s recommendations to base APM gas prices on crude oil prices, enact floor and ceiling prices, provide a 20% premium for gas from new wells, and keep the current pricing system for gas from problematic fields.
- The panel’s recommendation to increase the ceiling yearly, though, was changed. Notwithstanding the Parikh panel’s recommendation to raise the ceiling by 50 cents yearly, the government decided to keep the annual rise at 25 cents. Also, the administration made the decision to start lifting the cap price after two years.
- One of the panel’s primary suggestions is the deregulation of APM petrol price, although the government hasn’t yet spoken on it.
- The Parikh panel recommended that by 2027, the market should decide how much APM petrol costs. Yet, the government’s published details of the new pricing structure do not imply deregulation of APM petrol prices.
Conclusion:
- As a result, the recently adopted domestic gas pricing structure strikes a balance between the interests of gas producers and consumers. Also, it will help India reach its objectives of growing domestic gas production and dramatically raising the proportion of natural gas in the country’s energy mix.
