Delink pricing of natural gas, crude

In September 2022, the Ministry of Petroleum and Natural Gas (MPNG) formed a committee led by Dr Kirit Parikh to review the current pricing formula for domestically produced natural gas (NG) and make recommendations to restructure the formula in order to ensure “a fair price to the end consumer.”

It has recommended linking the price of NG from legacy fields to the price of imported crude oil with a floor and ceiling. The floor price will be $4 per million British thermal units (mmBtu), and the ceiling price will be $6.5 per mmBtu, with an annual increase of $0.5 per mmBtu. From January 1, 2027, the price will be market-determined.

For deep/ultra-deep (D/UD) and high-pressure/high-temperature (HP/HT) fields, which currently enjoy marketing and pricing freedom but can’t sell at a price beyond a threshold, the committee has suggested that the ceiling be continued for three years. Starting January 1, 2026, there will be no cap.

Every year, India consumes 59.5 billion cubic metres (bcm) of natural gas. Of this, nearly 54 per cent, or 32.13 bcm, is produced domestically, and the balance is met from imports of liquefied natural gas, or LNG. Of the domestic gas, around two-thirds, or 21.5 bcm, comes from legacy fields given under the New Exploration and Licensing Policy (NELP) (launched in 1999), as well as blocks given on nomination to state-owned ONGC and Oil India Limited (OIL) before the NELP.

Under the pricing guidelines effective since November 2014, supplies from the aforementioned fields are a weighted average of prices at four international locations: Henry Hub (the USA), Alberta Gas (Canada), NBP (National Balancing Point) (the UK), and Russian Gas. It is revised every six months in a financial year. The current price is $8.57 per mmBtu as of October 1, 2022.

As of October 1, 2021, this price was US$2.9 per mmBtu. It more than doubled to $6.0 per mmBtu from April 1, 2022, and has now risen to $8.57 per mmBtu as a result of the Ukraine war and sanctions imposed by EU countries and the US. This has had an impact on users, particularly the fertiliser industry, CNG (compressed natural gas), and PNG (piped natural gas), resulting in a steep increase in fertiliser subsidies and a 70 per cent increase in CNG and PNG prices.

The committee was looking for ways to lower the price. It has proposed two changes. First, it has benchmarked the NG price to the price of imported crude. However, even at 10 per cent of the current crude price of the Indian basket ($83 per barrel), the price comes to $8.3 per mmBtu. As a result, the committee has proposed a cap of $6.5 per mmBtu to provide relief to users.

An annual increase of $0.5 per mmBtu is consistent with its proposal to offer free pricing beginning January 1, 2027. By then, the regulated price will be close to the market price of $8.5 per mmBtu, allowing for a smooth transition. Meanwhile, the $4 per mmBtu floor is intended to protect producers in times of emergency, such as when global gas prices fall below $2 per mmBtu in April/May 2020.

The above roadmap is the way to go, except that the linkage to the crude price is unwarranted. NG is not a replacement for crude. Its pricing has to be its own, especially when we consider that the urea industry—a major consumer—is almost entirely based on gas. Furthermore, because the aforementioned four locations have fairly mature gas markets, the prices obtained there are reasonable. Accordingly, the existing formula should continue.

The committee has also recommended a premium of 20 per cent over the APM price for new gas ONGC/OIL produces from old or legacy fields. This strange category ‘new gas from old’ is nothing but an attempt to obfuscate. Consumers will end up paying $7.8 per mmBtu (6.5 x 1.2) with a 20 per cent premium, equating to “giving with one hand and taking away with the other.”

The government should not accept this recommendation.

One-third of domestic gas comes from D/UD and HP/HT fields. Such supplies receive a “premium” price, arrived at based on a process of competitive bidding subject to a ceiling linked to the prices of alternate fuels, including fuel oil, naphtha, and LNG. The current bid price (albeit a ceiling) is $12.6 per mmBtu as of October 1, 2022.

Amidst the current tight supply, the market-determined price is substantially higher than the ceiling. So, the ceiling applies. But the ceiling itself is inflated. The committee wants this to continue for three years, which will be debilitating to users who depend on this gas to supplement the legacy stuff for meeting their full requirements.

Supplies from D/UD and HP/HT fields should be governed by the same formula as for legacy fields. This is logical, as although producing gas from the former involves a higher investment, they also deliver more, thereby generating higher revenue even with the same price.

(The writeris a policy analyst)