Opinion Proposed changes in gas pricing fail to adequately address the needs of the consumer
Government must develop a firm and rational system of pricing natural gas that can be applicable to both the public and private sectors
Since at least 2004, and possibly earlier, India has been seeking to raise the share of gas in her energy mix and the current aspiration is to achieve a 15 per cent share by 2030. (Express Photo) 
The last nine years have been highly eventful in India’s social, economic and political development. Despite the disruptions caused by the Covid pandemic and the war in Ukraine, India has delivered relatively rapid growth while maintaining fiscal stability and pursuing wide-ranging reforms aimed at raising and broad-basing access to essential goods and services. Among multiple positives, India’s energy sector stands out as a debilitating drag on realising a threshold level of prosperity for all. For well over two decades, India’s per capita commercial energy consumption has remained around a third of the global average — at par with sub-Saharan levels. India cannot achieve her well-deserved geopolitical standing, in a multi-polar world, without addressing her energy poverty.
India accounts for just under 6 per cent of global commercial energy consumption. It consumes under 23 per cent of the commercial energy consumed by China in both absolute and per capita terms. India’s share of global gas consumption is just 1.5 per cent and gas accounts for only 6.3 per cent of India’s commercial energy basket. Since at least 2004, and possibly earlier, India has been seeking to raise the share of gas in her energy mix and the current aspiration is to achieve a 15 per cent share by 2030.
Without reference to the above reality of India’s energy and gas sectors or the repeated past attempts, including court battles in India’s Supreme Court, to get gas pricing and gas markets right, multiple articles have welcomed the move by the Government of India modifying the October 2014 pricing mechanism for domestically produced natural gas. This euphoria is further fuelled by the 8-10 per cent price reductions announced for CNG and PNG respectively by the major CGD players. However, a closer look raises multiple unanswered questions about the logic driving the proposed changes and whom they benefit.
First, the revision comes at a time when Natural Gas and LNG prices have fallen by 70 per cent or more from their peaks in the previous year. The current Henry Hub price for natural gas is just above 2$/MMBTU after briefly falling below the $2 threshold; thereby yielding a well-head price in the $1.50-$1.60 range for natural gas in the US. Surplus Russian natural gas is desperately seeking buyers. And spot LNG is trading well below $13/MMBTU. The proposed changes deny Indian consumers the benefit of these falling prices.
The changes proposed do not impact the pricing of gas from the now so-called “difficult” KG Basin fields. The March 31 notification establishing the wellhead price of $12.12/MMBTU for these “difficult” fields for the six-month period April 2023-September 2023 remains intact. This price is only marginally below the wellhead price of $12.46/MMBTU paid for natural gas from these “difficult” fields in the previous six-month period ending March 31, 2023.
The high well-head prices in India for domestic natural gas ensure a continued high price for LNG exports to India, except for the Qatar LNG covered by an earlier long-term supply contract! Importantly, it is noted that over half the installed gas-based power generation capacity remains stranded because even the LNG imported under the old Qatar contract is unaffordable for power generation. The capacity utilisation of the Kochi LNG terminal is only 16-17 per cent and Petronet has been trying to rent out the Kochi facilities to international gas traders.
The new order delivers an unprecedented global first by linking the well-head price of natural gas to crude oil. Such a linkage is typically followed, worldwide, for pricing LNG, with an appropriate floor and a ceiling price. Again, while adopting this hitherto unknown pricing technique for natural gas at the well-head, the order fixes the said price at 10 per cent of the Indian crude basket even though the energy equivalent of natural gas is 17.2 per cent of crude.
Importantly, for the KG Basin fields, the price is capped at the full energy equivalent of alternate imported fuels. The logic behind this differential treatment and the magnitude of the difference imposed remains unclear.
What is even more intriguing is that the floor price of $4/MMBTU and the ceiling price of $6.5/MMBTU for domestic natural gas, now priced at 10 per cent of the Indian crude basket, is applicable only to the gas produced from the nominated fields of ONGC/OIL and not to all natural gas fields covered by government-administered prices. Again, the basis for choosing the floor of $4 and the ceiling of $6.5 and applying it selectively to only certain public sector natural gas fields remains unclear.
The nominated fields of ONGC/OIL that are subject to a floor price and a ceiling price will, however, be eligible for an arbitrary 20 per cent premium for natural gas produced from “new wells” or through “well intervention”. In addition, after April 1, 2025, the ceiling price for such nominated fields will be raised by an arbitrary $0.25/annum. The reasoning for these arbitrary provisions, applied selectively to certain fields, also remains unclear.
The different formulations for pricing the same commodity are, thus, further complicated by the proposed new and unprecedented variations. This is prone to gaming, thereby creating winners and losers on a non-level playing field. Global experience confirms that in such situations the consumer is always the ultimate loser.
The question we should be asking today is: How do the proposed changes help in, one, addressing India’s dire energy poverty and, two, promoting a competitive gas market that delivers a share of 15 per cent to gas in India’s commercial energy basket? The proposed pricing changes do not seem to measure up to these two overarching objectives. Gas consumption in India is actually being curtailed to sectors that carry huge subsidies or cross-subsidies and to end uses wherein the alternative fuels available are priced higher still. This is not criticism for the sake of criticism — it is to emphasise the need to develop a firm and rational system of pricing of natural gas, applicable to both the public and private sectors.
Chandrasekhar is the former Cabinet Secretary, Government of India and Sethi is the former Principal Adviser Power & Energy, Government of India and former Visiting Professor, National University of Singapore and former UNESCO Chair Professor for Climate Science & Policy, TERISAS
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