10th October – Natural Gas Market Reforms

Natural Gas Market Reforms

Petroleum Minister Dharmendra Pradhan has announced the ‘natural gas marketing reforms’ that the Cabinet Committee on Economic Affairs cleared recently. These reforms just reinforces how twisted India’s policies are, how reforms are mostly made in a piecemeal manner; that, of course, is the main reason why they don’t deliver as much as hoped.

The ‘pricing’ dilemma –

Over 70% of India’s natural gas production doesn’t get the benefit of the new marketing freedom given. The reason for not freeing up prices of all natural gas, as in the past, is that if gas prices rise, so will the costs of fertiliser and electricity; but unless existing producers like ONGC are able to earn more from the gas they produce, how are they going to get the resources to invest in exploring/extracting more gas? And until that happens, the bulk of India’s gas needs—right now, this is around 60%will continue to be met through imports that cost more than locally produced gas.

Pricing and marketing freedom –

  • There is a distinction between what is called ‘pricing’ and ‘marketing’ freedom. Both mean the same thing; that firms producing natural gas are free to sell their output at the market price.
  • Apparently not, since India has four or five types of prices. There are the ‘domestic price guidelines’—this used to be called Administered Price Mechanism (APM) earlier—and gas produced under this is sold at $1.79 per mmBtu; the costs of production, though, are significantly higher.
  • Since keeping gas prices low dissuaded new investment, in 2016, the government raised the prices but only for new discoveries and that too, for gas produced in the deep or ultra-deep waters or high-temperature-high-pressure areas; if the gas was produced onshore, it didn’t get the higher price.
  • In addition, there are imported prices that are around $5-7 per mmBtu. And after the recent reforms, there will be a price for gas that is, for instance, found onshore or in relatively shallow waters; this price will be market-determined.

Why the new reforms are insufficient?

  • In the past, while producers like Cairn India had ‘pricing’ freedom, they did not have ‘marketing’ freedom. This meant a Cairn could go to, say, an IOC or a Tata Power — this distinction between ‘pricing’ and ‘marketing’ freedom applies to crude oil as well — and say it wanted the market price for its natural gas, say $6-7 per mmBtu. But since Cairn was not allowed to sell to anyone—the recent reforms allow this for natural gas, not for crude oil—IOC or Tata Power would most likely turn it down and decide what price it would pay.
  • Indeed, a report from the government’s Petroleum Pricing and Analysis Cell (PPAC) had pointed out that ONGC could earn $10 more per barrel if it could sell its crude to refineries that were more sophisticated than those of the PSUs to whom it supplies today. In the case of Cairn India, having ‘pricing’ but not ‘marketing’ freedom has meant it has to sell its crude at a lower price to not just PSUs, but even to private sector refiners like Reliance Industries.

Conclusion –

If the government really wants India’s petroleum imports to fall from 77% in FY14 to 67% in FY22—it has risen in the last six years thanks to unfriendly government policy—he needs to ensure the sector is completely freed instead of today’s piecemeal changes, and that includes a substantial reduction in the government levies on the sector.

SourceFinancial Express

QUESTION – Although the government proclaims that the new natural gas market reforms will usher an era of transparency and competitiveness in the market to reduce import dependence, the critics suggest that it would make little impact in the sector. Why? Discuss.

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