Government ties Local Gas Price to Global Crude Benchmarks [UPSC Notes]

The Cabinet Committee on Economic Affairs approved a new gas pricing mechanism, linking domestic natural gas prices to global crude prices. In this article, we discuss the details of this move, how it will impact gas prices in India and other details for the IAS exam Indian Economy segment of GS Paper 3.

Current Gas Pricing Mechanism

• It is based on the domestic gas pricing guidelines approved in 2014, which were based on the recommendations of the C Rangarajan committee.
• Domestic gas price is set for a period of 6 months based on volume-weighted prices prevailing in 4 gas trading hubs (Henry Hub, Albena, National Balancing Point (UK), and Russia) for a period of 12 months.

Reason for the recent reforms:

• The earlier systems had significant time lag and high volatility.
• Following a surge in international gas prices over the last few years, the prices of both CNG and PNG in India rose. Additionally, this increase in gas prices has led to a higher burden of fertilizer subsidies.

Gas Pricing Mechanism Changes

• The reforms introduced are based on the recommendations of the Kirit Parikh panel.
  • Accepted recommendations of the Kirit Parikh panel:
    • Benchmarking of APM gas price to crude oil price
    • Introduce floor as well as ceiling prices
    • Provide a 20% premium for gas from new wells
    • Leaving the pricing system for gas from difficult fields unchanged
  • Recommendations which were not accepted:
    • Hiking the ceiling every year
      • Government decided to start hiking the ceiling price after two years
    • Raising the ceiling by 50 cents per year
      • Government has decided to maintain a yearly increment of 25 cents.
    • Deregulation of APM gas prices.
      • Panel recommended making APM gas prices market-determined by 2027.
• The APM gas price will be recalculated on a monthly basis and will be equivalent to 10% of the average price of the Indian crude basket in the preceding month.
  • Indian crude basket represents a derived basket that includes both sour and sweet crude oil grades in a proportion of 75.62 to 24.38, reflecting the blend of crude grades utilized by Indian refineries.
• Gas produced from legacy or nomination fields will have a floor price of $4 and a ceiling price of $6.5 per million British thermal units (mBtu).
  • Legacy or nomination fields: These are oil and gas fields that were granted to ONGC and OIL prior to 1999, following which auctions became the means of awarding such blocks.
    • Natural gas production from these fields accounts for about 2/3rd of India’s total natural gas production.
    • The pricing regime followed on the domestic natural gas produced from these areas mainly came under administered price mechanism (APM).
    • Since 2014, these prices were determined based on the modified Rangarajan formula.
  • It can be inferred that regardless of whether the gas price as per the formula decreases, the two companies will receive at least $4/mBtu. Similarly, even if the formula-based price for APM gas rises significantly, the maximum price that the companies can obtain is limited to $6.5/mBtu.
• The ceiling price will remain unchanged for a period of two years, following which it will be raised by 25 cents annually.
• The new pricing system aims to incentivize ONGC and OIL to increase production from their legacy fields by offering them a premium of 20% over the APM price for gas extracted from new wells and for implementing technology enhancements in existing wells.
• The new pricing formula does not extend to gas extraction from difficult acreages such as the ones from high-temperature and high-pressure fields, deep and ultra-deep waters.

Impact of Linking Local Gas Prices to Global Crude Benchmarks

• It will protect the customers from high prices, at the same time, ensuring that producers don’t face losses.
• The government anticipates that the implementation of the new pricing mechanism will lead to a considerable reduction in retail prices for compressed natural gas (CNG) used as fuel for automobiles and piped natural gas (PNG) for households.
• It is also expected to aid gas-based power generation units and lower the government’s fertilizer subsidy burden.
• Under the new regime, APM gas prices will be tied to crude oil prices, which is currently the standard practice in most international natural gas contracts. This approach is more suitable for India’s consumption patterns and is supported by deeper liquidity in global trading markets, which offer real-time updates.

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