Govt plans floor price for domestic natural gas amid falling prices, demand

Relief for producers as prices and demand falling globally

In what may bring relief to domestic natural gas producers, the Union government is considering setting a floor price for their output. The plan will benefit Oil and Natural Gas Corporation (ONGC), which contributes nearly 80 per cent of natural gas production in India, the most, besides Oil India (OIL), Vedanta’s Cairn Oil and Gas, and Hindustan Oil Exploration Company (HOEC). 

The government has set up a committee comprising representatives from the Petroleum Planning and Analysis Cell (PPAC), ONGC, OIL, and GAIL. An official confirmed that the setting of a floor price was under consideration, and that the proposal would need to be cleared by the Cabinet. 

“The committee is set to submit its report next month. Whether the floor price will be effective from October 1 or during the upcoming price cycle (March 2021 onwards) will be decided only after the committee’s recommendations,” said a company official aware of the development.

For April-September 2020, the domestic natural gas price was set at $2.39 per million metric British thermal unit (mmBtu), which is expected to be $1.8-$1.9 mmBtu during the October 1-March 31 period of FY21. “Based on the current formula, prices were going down. Hence, there was demand coming from producers, especially ONGC, to give a support price or basic floor price, as prices are expected to go further down in the upcoming cycle,” said the official.

Under the current norms, the price of domestic gas is linked to a formula that is indexed to the weighted average of global benchmarks like Henry Hub, Alberta gas, NBP, and Russian gas. The price is fixed for six months based on the formula pricing of the preceding six months. Besides, the government through the PPAC also notifies a cap price for difficult fields.

For producers like ONGC, gas prices are much lower than per barrel operating expenditure, resulting in negative returns even at the current price. The average cost of production of natural gas by ONGC was around $ 3.6 per mmBtu during the last financial year, which means the company will only be earning about half its operating cost if prices are revised to $1.8-$1.9 per unit. The new floor price is likely to be set based on an international benchmark. Industry experts indicate that the floor pricing may be set somewhere around $3 a unit.

"If a floor price is set, there will be a temporary relief for producers as prices are falling and the demand for natural gas is going down internationally. There is excess natural gas in the market, with LNG prices also declining. I believe that they should give away with the formula and it should be a free market price, which will ensure that producers will get better returns,” said Ashu Sagar, secretary general of the Association of Oil and Gas Operators. He added the current formula was defective as an energy short market (India) was following an energy excess market as its base.