Fixing gas prices

Producers should have policy certainty

In the past decade, India has repeatedly reviewed the formula to price natural gas. Every subsequent review has sliced away price reform goals that were the original purpose of these exercises, and increased the discretion of bureaucrats in price setting. The latest such initiative, led by former Planning Commission member Kirit Parikh, has recommended another method. The committee has suggested a cap of $6.5 per million British thermal units (Btu) as a ceiling and a floor of $4 per million Btu on gas supplies from ONGC and Oil India’s older fields, or administered price mechanism (APM) gas. It’s unclear though how these numbers were arrived at. What’s obvious is that the ceiling is 24 per cent lower than the $8.57 per million Btu that ONGC and others charge for supplies. Gas prices are adjusted every six months in India in line with international pricing benchmarks. Given the challenges in pricing gas globally, it’s typically pegged to oil or substitute fuels. India’s current gas pricing formulae are pegged to international benchmarks like the US Henry Hub and the UK’s National Balancing Point, and Russian and Canadian domestic gas rates, bringing them closer to market levels.

Now this is set to change. Once the latest recommendations are accepted, domestic gas prices will be linked to 10 per cent of the cost of crude oil imported into India. The reason for altering the peg is that gas now costs more than oil, unlike in the past where it typically traded below oil. Since the pandemic and the conflict in Ukraine, imported liquefied natural gas (LNG) has seen the equivalent of $250 a barrel in oil terms, while crude trades at below $100 a barrel. In such a scenario, industries and households shift to substitutes like naphtha and fuel oil, abandoning the cleaner gas. This shouldn’t matter much in mature markets, but in the case of India where large sums have been invested in gas transmission pipelines, LNG import terminals, and a city gas network covering large parts of the country, it can become a cause for concern. India allocates scarce APM gas to fertiliser and city gas facilities, and depends on imported LNG for over half its needs. This ratio will only rise as the government intends to more than double the share of gas to 15 per cent of its energy mix by 2030. Given the clamour for better air quality, other nations are also adopting gas as the fuel of transition, driving up global demand and prices.

Until recently, India was expecting LNG to cost $2-6 per million Btu. A 25-fold surge in prices since March was significant for Indian companies and policymakers to bear. APM gas prices for the April-September period more than doubled to $6.10 per million Btu from October-March 2021 under existing guidelines, hurting city gas utilities, and doubling the fertiliser subsidy budget. Thus, the government decided to review pricing. Oil and gas exploration is an expensive and high-risk business. Investors thus expect pricing freedom and policy certainty to protect their investments. India’s geology, for instance, is not like Saudi Arabia’s that would attract explorers for resource potential. Therefore, it is important to provide pricing freedom and policy certainty at all times. In case the government wants to prevent supernormal profits during periods of high prices, a transparent windfall tax on gas could be an option. Collection from such a levy can be used to support consumers.