Context:
The Kirit Parikh committee on gas pricing reforms made several key recommendations that aimed to address pricing issues in the Indian energy sector.
What’s in today’s article?
- Existing Gas Pricing in India
- News Summary
Existing Gas Pricing in India
Much of the natural gas being produced in the country does not command a market-determined price — that is, it is not determined by buyers and sellers based on demand-supply dynamics in the market.
Rather, as per the 2014 guidelines, a formula is used to fix the price of the fuel every six months.
As per this formula, the domestic gas price is the weighted average price of four global benchmarks:
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US-based Henry Hub,
Canada-based Alberta gas,
- UK-based NBP, and
- Russian gas.
- The domestic price is based on the prices of these international benchmarks in the prior year, and kicks in with a quarter’s lag. It applies for six months.
- So, the price applicable from April 1 to September 30, 2022 is based on benchmark prices from January to December 2021.
Criticism of this Formula:
Domestic gas prices have been rising in the past couple of years but thanks to the formula, they are still cheaper than imported gas.
Now, this acts as disincentive to local producers such as ONGC, Oil India and Reliance Industries who often find that the price is not worth their time and effort to increase output.
This eventually leads to increased gas imports at higher prices.
Incentives for Domestic Production:
To boost domestic gas production, the committee recommended removing the ceiling price and granting complete pricing and marketing freedom by January 2027.
This step would create incentives for investments in exploration and production (E&P) activities.
Additionally, providing a 20% price premium to producers like ONGC and OIL for increasing production from their non-APM fields encourages increased domestic production.
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Significance
APM gas price prices linked to crude oil prices
Addressed the issue of time lag
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.
Attempt to balance demands of consumers as well as producers
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.
Hence, by bringing ceiling and floor price, it attempts to bring a balance.
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Significant decrease in prices of PNG and CNG
The reforms will lead to a significant decrease in prices of Piped Natural Gas (PNG) for households and Compressed Natural Gas (CNG) for transport.
The reduced prices shall also lower the fertilizer subsidy burden and help the domestic power sector.
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The New Gas Pricing Policy,The New Gas Pricing Policy
