Changes in domestic gas pricing mechanism to benefit public and industry

The government's move to change the pricing mechanism for domestic gas produced from old gas fields will result in a reduction in prices for piped natural gas (PNG) and compressed natural gas (CNG) for automobiles, besides helping the growing domestic gas industry.

PNG prices for households will fall by about 10% and CNG prices by 7-9%, the government’s estimates suggest. The move is also seen as a step further to create a gas market in the country and increase domestic gas consumption to about 15% from the current 6-7% of the country's total energy mix, experts say.

The Petroleum Planning & Analysis Cell (PPAC) of the Ministry of Petroleum & Natural Gas last week announced reduced gas prices to $6.5 per mmBtu (million British thermal units) from $8.57 per mmBtu earlier for domestic gas sold under the administered price mechanism (APM), which is applicable for gas produced from legacy fields awarded before 1999 to domestic gas producers - mainly public sector Oil and Natural Gas Corporation (ONGC) and Oil India (OIL).

India produced about 31,494 million standard cubic metres (MMSCM) of natural gas in 2022-23 and legacy or 'nomination fields' account for 70% of the production. APM gas is allocated by the government mainly to power companies (about 34% in 2021-22), fertiliser (17%) and city gas distributors (22%).

“APM prices declining to $6.5/mmBtu could mean a 9-11% cut in CNG and PNG prices, assuming companies pass on the benefit to end-consumers. In contrast, as per the earlier APM regime, gas prices could have risen further to $10-11/mmBtu for the first half of fiscal 2024 from $8.57/mmBtu for the six months ended March 2023, necessitating a price increase, in turn, for city gas distributors to maintain profitability,” says Naveen Vaidyanathan, director, CRISIL Ratings.

“Realignment of the Gas Pricing mechanism by insulating the Indian consumers from the spikes in Global prices will soften prices in India and will provide much-needed relief to the transportation sector," says Vinod Aggarwal, president, the Society of Indian Automobile Manufactures (SIAM) and MD & CEO, VECV.

The government had appointed a committee under Kirit Parikh last year to recommend reforms in the gas sector and the cabinet approved recommendations on changes in the APM pricing mechanism.

The government also changed the pricing mechanism for APM gas by benchmarking the price to that of imported crude oil. APM gas prices will be 10% of the average price of the Indian crude basket in the earlier month and will be revised on a monthly basis. To insulate both consumers and producers like ONGC and OVL from high volatility in crude prices, the government also brought in a floor price of APM gas at $4/million British thermal units (mBtu) and a ceiling price of $6.5/mBtu.

Since 2014, the government was revising APM gas prices twice a year, after analysing yearly gas prices in four international gas trading hubs of Henry Hub, Alberta, National Balancing Point in the UK, and Russia. The industry was complaining of losses by this system as the prices were volatile and had a time lag due to yearly calculations. In most global gas markets, prices are linked to real-time global crude prices.

"Gas prices have seen wide fluctuations over the years, from a low of $1.79 per million British thermal units (mmBtu) in 2021 to a high of $8.57/mmBtu for the 6-month period ending March 2023. Global gas prices have been even more volatile, exacerbated by the ongoing Russia-Ukraine conflict," says CRISIL.