23rd April – Domestic Gas Pricing Formula

Earlier this month, the Centre increased the price of domestic natural gas by nearly 10 per cent to $3.69/mmbtu. This was the fourth consecutive hike in the past two years. This price is determined using a formula introduced in October 2014.

Domastic Gas Pricing

What is it?

  • 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.
  • Rather, a formula is used to fix the price of the fuel every six months. As per the formula, the domestic gas price 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 kicks in with a quarter’s lag. It 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.

Significance –

This formula-based pricing has some interesting features and outcomes.

  • One, the formula has no mention about gas actually imported into India. Typically, 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.
  • Next, the averaging of benchmark prices over the past year and then the time lag of a quarter mean that the domestic gas price movement is often out of sync with what’s really happening on the ground.
  • For instance, global gas prices were rising for a good part of the last year but have been on a decline in the last few months. But courtesy the formula, domestic gas producers have now been handed out price hikes, even as many global producers are taking price cuts.

Need of new pricing formula –

  • Domestic gas prices have been rising in the past couple of years but thanks to the formula, they are still cheaper than imported gas. Now, this acts as disincentive to local producers such as ONGC, Oil India and Reliance Industries who often find that the price is not worth their time and effort to increase output.
  • Therefore, there are increased gas imports at higher prices. Over the years, India’s import dependency has steadily risen and now is inching towards 50 per cent.
  • For domestic producers, the Centre in March 2016 offered ‘pricing freedom’ for gas produced from discoveries in difficult locations (deep water, ultra-deep water and high pressure-high temperature areas).
  • But even here, the price is not truly market-linked and there is a cap based on prices of alternative fuels. So, for such gas, the price ceiling for the April to September 2019 period is $9.32/mmbtu, the highest in two years.
  • To be fair, the Centre has been taking corrective steps such as giving pricing freedom under the new Hydrocarbon Exploration Licensing Policy. But output from many of the fields that are already producing are still subject to formula-based pricing.

Conclusion –

The Centre walks a tightrope here, balancing interests of producers and consumers. Gas is not just a state of matter; it is also a matter of the State.

SourceThe Hindu Business Line

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