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Journalism of Courage
The Union Cabinet on Thursday (April 6) approved significant changes in the pricing regime for domestic natural gas under the ambit of the administered price mechanism (APM), which mainly applies to gas produced by legacy fields, or nomination fields, of national oil companies Oil and Natural Gas Corporation (ONGC) Ltd and Oil India Ltd (OIL).
Nomination fields are acreages that the government awarded to ONGC and OIL before 1999, after which auctions became the basis of awarding oil and gas blocks. The price of APM gas, which accounts for about two-thirds of India’s natural gas production, has been determined as per the ‘modified’ Rangarajan formula since November 1, 2014.
(Soon after coming to power, the Narendra Modi government tweaked the formula devised by a committee appointed by the UPA government under C Rangarajan, chairman of the PM-EAC.)
Key changes in the pricing regime, which were notified on Friday and will take effect from Saturday, include benchmarking the price of APM gas to the price of imported crude instead of gas prices in four international gas trading hubs, and monthly, rather than biannual revisions in prices.
The new pricing regime also provides for floor and ceiling prices — $4 and $6.5 per million British thermal units (mBtu), respectively — for ONGC and OIL’s APM gas with the intention of shielding consumers from high prices while ensuring that the producers are not forced to book losses on gas sales.
The government expects the new pricing system to result in significant reduction in the retail price of piped natural gas (PNG) for households and compressed natural gas (CNG) used as an automobile fuel. It is also expected to lower the government’s fertiliser subsidy burden, and aid gas-based power generation units.
After international gas prices shot up over the past couple of years due to a combination of factors including the war in Ukraine, CNG and PNG prices in India surged, in addition to the higher fertiliser subsidy burden. Information & Broadcasting Minister Anurag Thakur said that as soon as the new pricing formula is implemented, PNG prices for households will fall by about 10 per cent, and CNG prices by 7-9 per cent.
The revised pricing mechanism is based on recommendations of a panel headed by Kirit Parikh. The panel was constituted last year to delve into the extant gas pricing guidelines and recommend changes to balance the interests of gas consumers and producers, while also helping India achieve its aim of increasing domestic gas output and substantially increasing the share of natural gas in the country’s energy mix.
However, not all of the panel’s recommendations have made it to the new gas price rules.
Henceforth, the price of APM gas will be 10 per cent of the average price of the Indian crude basket in the preceding month. The price will be revised every month.
Gas produced from ONGC and OIL’s nomination fields will have a floor price of $4/ mBtu and a ceiling of $6.5/ mBtu. This means that the two companies will get a minimum of $4/ mBtu even if the gas price as per the formula falls to a lower level.
Similarly, no matter how high the formula-based price goes, the maximum price they can realise for APM gas will be $6.5/ mBtu.
The Petroleum Planning & Analysis Cell (PPAC) of the Ministry of Petroleum & Natural Gas on Friday notified $7.92 per mBtu as the price of domestic natural gas as per the revised formula for the remainder of April. As per PPAC data, the average price of the Indian crude basket in March was $78.54 per barrel. However, ONGC and OIL will get $6.5 per mBtu.
The price of APM gas was $8.57/ mBtu for the six months ended March 31. The government kept on hold the scheduled price revision for APM gas for April-September 2023 as it was in the process of changing the pricing formula. As per estimates, the price of APM gas as per the modified Rangarajan formula would have risen to over $10.5/ mBtu for the six months starting April.
There shall be no revision in the ceiling price for two years, after which the cap will increase by 25 cents per year.
To encourage ONGC and OIL to make efforts to raise output from legacy fields, the new pricing regime allows the two companies a premium of 20 per cent over the APM price for gas produced from new wells, and for technology interventions in existing wells.
As per the 2014 gas pricing guidelines, the APM gas price was set for a six-month period based on the volume weighted prices prevailing at four international gas trading hubs — Henry Hub, Alberta, National Balancing Point in the UK, and Russia — for a period of 12 months and a with a lag of a quarter.
According to the government, the earlier system based on these gas hubs had a significant time lag and high volatility and, therefore, “the need for this rationalisation and reform was felt”.
The new regime will have the APM gas price prices linked to crude oil prices, which has now become the prevalent practice in most natural gas contracts internationally, is more relevant to India’s consumption basket, and has deeper liquidity in global trading markets on a real-time basis.
With the changes in the pricing formula, data of the Indian crude basket price from the previous month would form the basis for APM gas price determination. The Indian crude basket represents a derived basket consisting of sour grades and sweet grades of crude oil in the ratio of 75.62 to 24.38. It represents the mix of crude grades processed by Indian refineries.
Over the past few years, ONGC and OIL had been petitioning the government for a floor price as they were forced to sell gas at a loss for a prolonged period when prices sustained below their cost of production. On the other hand, gas consuming industries had been urging the government to ensure affordability of domestic natural gas. The new pricing formula attempts to balance demands of consumers as well as producers.
The changes in pricing formula for domestic APM gas do not apply to gas production from difficult acreages — deep water, ultra-deep water, high-temperature, and high-pressure fields. A pricing regime for gas from difficult blocks — such as Reliance Industries and BP’s KG-D6 and ONGC’s KG-DWN-98/2 — was introduced in 2016, which allowed marketing and pricing freedom subject to a ceiling price. The revision in ceiling price for difficult fields was done every six months along with APM gas price revision.
Petroleum Secretary Pankaj Jain said that the Cabinet had only approved changes to the 2014 norms for APM gas and not the 2016 norms for difficult blocks. Therefore, the existing pricing regime for gas from difficult blocks shall continue. The ceiling price for gas from such fields has been set at $12.11 per mBtu for April-October.
Although the new domestic gas pricing regime is based on the Parikh committee’s recommendations, not all of the panel’s key suggestions made it to the new pricing regime. The government accepted the panel’s recommendations to benchmark APM gas price to crude oil price, introduce floor as well as ceiling price, provide a 20 per cent premium for gas from new wells, and leave the pricing system for gas from difficult fields unchanged.
But the panel’s recommendation on hiking the ceiling every year was tweaked. The Parikh panel had recommended raising the ceiling by 50 cents per year, but the government decided to keep the annual increment at 25 cents. Also, the government decided to start hiking the ceiling price after two years.
One of the panel’s key recommendations that the government has so far not commented on is the deregulation of APM gas prices.
The Parikh panel had recommended that APM gas prices be made market-determined by 2027. However, the details of the new pricing regime shared by the government does not have any mention of deregulation of APM gas prices.
