Natural Gas pricing regime

Natural Gas pricing regime

Subject: Economy

Context:

The Kirit Parikh committee was appointed  to review the gas pricing formula.

Concept:

Natural gas pricing:

The natural gas pricing scenario in India is complex and heterogeneous in nature.

• Formula based pricing formula/Administered Price Mechanism (APM)
  • Much of the natural gas being produced in the country does not command a market-determined price — that is, it is not determined by buyers and sellers based on demand-supply dynamics in the market.
  • The price of natural gas produced from fields awarded to state-owned ONGC and Oil India regulated under the Administered Price Mechanism (APM).APM gas accounts for over 90 per cent of ONGC natural gas output.
  • The government sets the price of gas every six months-on April 1 and October 1, each year.It  is the weighted average price of four global benchmarks — the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas.
    • The domestic price is based on the prices of these international benchmarks in the prior year and applies with a quarter’s lag and  applies for six months.
    • So, the price applicable from April 1 to September 30, 2019 is based on benchmark prices from January to December 2018.
    • APM gas has been allocated in priority to power producers and fertilisers
• Non-APM or Free Market Gas–two categories–domestically produced gas from Joint Venture fields and imported LNG.
  • The pricing of JV gas is governed in terms of the PSC (Production Sharing Contract) provisions.
  • While the price of LNG under term contracts is governed by the SPA (Sale and Purchase Agreement) between the LNG seller and the buyer, the spot cargoes are purchased on mutually agreeable commercial terms.
• Differential pricing exists for different sectors–Subsidized sectors such as power and fertilizer get relatively less prices as compared to other sectors.
• Region specific pricing exists in the country with North Eastern states getting gas at relatively cheaper prices as compared to other parts of the country.

Implication of formula based pricing:

• The formula has no mention about gas actually imported into India– gas imported in Asian markets is costlier than many international benchmarks. In effect, the price of domestic gas is lower than that of gas imports. 
• The time lag of a quarter means that the domestic gas price movement is often out