Parikh panel's plan to link gas prices to global crude comes a cropper

When the suggestion was made, crude was at a huge discount to gas; but now, with the unpredictable course of fossil fuel prices playing spoilsport, govt may be forced to do a rethink

India's idea or the idea of a high-level Indian committee's proposal to link gas prices to international crude oil benchmarks may have come unstuck after global gas prices plunged.

An expert committee, headed by former Planning Commission member Kirit Parikh, had recommended in November that domestic gas prices could be linked to crude instead of a basket of gas prices. When the recommendation was made, international crude oil prices were ruling at a significant discount to gas prices. The implicit idea was to keep gas prices relatively low. 

However, the unpredictable course of fossil fuel prices has played spoilsport and may force the government to reconsider implementing the Parikh Committee recommendation in April, just when crude prices are ruling at a massive premium to gas prices. In other words, domestic gas prices would have been cheaper under the existing gas-on-gas pricing formula. But if the Parikh Committee's recommendation of linking them to crude prices is accepted, rates may increase relatively.

Officials say the new pricing regime will apply from 1 April, though New Delhi has yet to make an official announcement. The change in pricing formula will apply to most of the 96 million cubic metres of gas a day produced in the country from older areas by state-run explorers ONGC and Oil India. India depends on imported LNG to meet 46 per cent of its needs.

Gas is back at a discount to crude, as it was typically in the past, said industry experts. LNG prices continue to slide and are now below oil parity, said Jean-Christian H, founder of Switzerland-based consultant Wideangle LNG. US gas benchmark Henry Hub, a key benchmark among others for setting India's gas extracted from older areas operated by state explorers ONGC and Oil India, or APM gas, is trading at a fifth of US crude benchmark WTI.

Prices of LNG are trading below oil parity because warm temperatures in Europe and northeast Asia, coupled with ample stocks, kept buyers away from the spot market, said Ayush Agarwal, LNG analyst at S&P Global Commodity Insights. "We are also yet to see major spot buying opportunities from China," he added.

S&P Platts West Indian Marker (WIM) physical assessment, a price assessment of LNG cargoes delivered to India's west coast, is a little over $13 per million British thermal units (MMBtu) compared to $33.2/MMBtu a year earlier. Agarwal forecasts WIM at around $13-$14/MMBtu this summer. WIM touched a record $84/MMBtu last year and averaged around $32/MMBtu. That compares to an average of $14/MMBtu in 2021 and may average less than $20/MMBtu in calendar 2023.

Henry Hub is down over 40 per cent now from a year ago levels, at around $2.50/MMBtu. According to US EIA data, prices soared to near $9/MMBtu levels in mid-2022.

This is how gas prices translate to oil parity. LNG has averaged around $13.5/MMBtu this month, which translates to around $78 a barrel of crude, a discount to Brent crude's $80/barrel average this month. A year earlier, in March 2022, LNG traded at $193 a barrel oil parity.

A key recommendation of the gas pricing committee, led by former planning commission member Kirit Parikh, was to alter the peg of APM gas to crude oil instead of to a basket of global gas rates, including US Henry Hub, Dutch TTF, UK NBP, Russian and Canadian gas among others. It also recommended a cap of $6.5 per million British thermal units as a ceiling, a 24 per cent discount to the $8.57 per million Btu that ONGC and others charge for APM supplies till 31 March.

Industry observers expect that slower gas demand amid a global recession and warmer winters could bring spot LNG down to $6 levels. That makes spot LNG cheaper than oil-indexed APM gas, even after applying the Parikh price cap.

Goldman Sachs has said that demand for crude oil will be strong, and prices will strengthen because of low investments in oil fields and low inventories. The US bank in February forecast Brent oil to average $92 a barrel in calendar 2023 and $100 a barrel in 2024.

Despite promising explorers and investors pricing reforms, the Modi government has interfered with gas prices. In 2014, it diluted the Rangarajan Committee's gas pricing formula by removing LNG prices as a benchmark to calculate domestic gas rates. It then capped the price of gas produced from unconventional areas, including deep waters. Last year, it constituted the Kirit Parikh Committee after city gas utilities complained that high rates were turning away consumers, industry officials said.