Deflating gas economy: Kirit Parikh has a tough task on hand as prices soar

As global prices soar, another committee to review gas pricing policies may find the going more challenging

Kirit Parikh has a tough task on hand as he readies India’s natural gas pricing regime for a churn. Parikh is a free-market proponent at heart — in a previous stint as head of a committee on the pricing methodology for diesel, domestic cooking gas and ration-shop kerosene during Manmohan Singh’s administration he recommended steep hikes in the prices of subsidised fuels, capping subsidies, and moving towards a market price for diesel.
 

But it’s trickier this time around, as Parikh prepares to head a new committee to review market-linked natural gas pricing in Prime Minister Narendra Modi’s administration. Singh was trying to steer the country away from state-set pricing; this time, most domestic gas prices are already pegged to international benchmarks and so closer to market rates. So it’s unclear what kind of suggestions can Parikh offer to free up the already free gas prices.
 

The Modi government is understandably concerned that surging fuel prices will put a premature end to India’s gas party after committing investments of over Rs 2 trillion to create a gas economy. With Russian supplies uncertain, Europe is becoming a key buyer for West Asian gas, which is putting pressure on prices.  At a global gas event in Milan, a senior executive from US Cheniere Energy, India’s second biggest LNG term supplier, said that the upcoming winter — when gas demand peaks in Europe — will be very tight accompanied by constraints on global LNG supplies.
 

“The days of cheap gas are over,’’ said Narendra Taneja, an oil industry expert. And that, said Vijay Duggal, former chief general manager, gas, BPCL, in a Linkedin post, is “a severe risk for price sensitive India”.
 

As long as global gas prices were stable, the gas price formula stayed untouched since 2014 and was typically at a discount to oil. The pandemic and the Ukraine conflict have upended Delhi’s calculations, with LNG now trading at a premium to crude.

That explains why the timing of the committee’s constitution coincides with record LNG rates, which India imports to meet around half its needs. Spot LNG is trading at over $50 per million Btu, over five-fold from a year earlier and 25 times higher than the pandemic-hit 2020 price. LNG prices were never expected to soar this high, said R Ramachandran, an oil industry consultant. “We expected it to be in the region of $3-$4 per million Btu.”
 

Prices of spot LNG may surge higher with Russia indefinitely stopping gas supplies to Europe via the Nord Stream pipeline. Europe is concerned over supplies, while, closer to home, India’s city gas sector, with huge investments pumped in by the likes of Adani and IOC, is struggling to adjust to record LNG rates. And New Delhi is burdened by a soaring fertiliser subsidy bill because gas is the major raw material for ammonia manufacturing and hence for urea.
 

The government is planning a review to reduce its subsidy burden on fertilisers, said Prashant Vashisht, vice president, at ratings agency ICRA. But funds earmarked for fertiliser subsidies this year have doubled because every dollar increase ($1 per million British thermal units) in gas rates adds Rs 4,500 crore to the subsidy burden, he added.
 

India has allotted most of its domestic natural gas to fertiliser plants and city gas facilities, which accounted for a combined 54 per cent of all gas consumed in July — at 33 and 21 per cent, respectively, according to oil ministry data.
 

Parikh’s committee will re-evaluate the domestic gas pricing formula, currently pegged to international gas benchmarks, and set by the government every six months.  
 

Currently, India has multiple gas prices that range from $6 per million Btu to over $25 per million Btu. Before 1999, bureaucrats assessed gas prices based on cost factors. Until 2013 companies awarded areas under the National Exploration Licensing Policy (NELP) rounds were allowed market prices through competitive bidding. But administered prices continued for older areas. In 2012, the Rangarajan committee recommended benchmarking domestic rates to US Henry Hub, UK NBP, Japanese Crude Cocktail, and imported LNG. That sent domestic rates soaring. So the Modi government tempered the recommendations, and came up with a new formula after excluding imported LNG rates.
 

Under the gas pricing guidelines of 2014, the oil ministry takes the volume of gas consumed by the US, Mexico, EU, Canada and Russia and multiplies it by the annual average of daily prices at US HH and UK’s NBP for North America and EU, respectively, and by the annual average of monthly prices at Alberta hub and the Russian government rates — after excluding 50 cents per million Btu from all benchmarks towards transportation and treatment costs. This helps set the cost of gas from older areas.
 

For deep-water fields, the government sets a ceiling price based on alternative fuel rates such as naphtha and fuel oil. Gas extracted from coal seams has no cap but is based on a formula linked to crude oil price, enabling Reliance to secure over $21/million Btu at an auction this year. Imported LNG is sold at market prices whereas LNG traded on IGX, the Mumbai-based gas exchange, discovers a different price. In August, the exchange delivered fuel at an average price of $30 per million Btu.

The government was unconcerned over multiple rates as long as they moved in a manageable range — despite ONGC losing money until last year on gas sales, an industry official said.
 

But trouble started this year after domestic prices for gas produced from conventional areas for the April-September period more than doubled to a record $6.10 per million Btu compared with October-March. Prices may reach $9-$10 per million Btu for October-March, Vashisht said, sending both fertiliser subsidies, and CNG prices skyrocketing. The ceiling price of gas from deep-water, ultra-deep-water, high-temperature and high-pressure areas was raised by 50 per cent to $9.92 per million Btu.

A fallout of the step back from pricing reforms, in the name of inflation and fiscal management, is alienating explorers from drilling in Indian waters, and making the country more nirbhar on foreign oil and gas.
 

Reliance Industries, India’s biggest producer of deep sea gas, and IGX, the country’s first gas exchange, have called for prices to be freed. So have foreign explorers such as BP, which has partnered with Reliance to invest $5 billion in the Krishna-Godavari basin, off India’s east coast. The areas will account for over a third of gas produced in the country.
 

Deep-sea exploration is a capital- and technology-intensive business, and we need foreign companies to extract gas found in our oceans, Taneja said. Unlike in West Asia, gas located in India is hard and costly to extract. There are possibilities that after spending hundreds of millions of dollars, the block may have no oil or gas, Taneja added. It’s a high risk business, so foreign companies want the freedom to set prices, an official from a state-run company said.

The models

• Phase: Pre 1999; Report: Pre-NELP
• Pricing and Profit Sharing Models:
• Assessed Pricing: Administered Price set by government (e.g. PMT gas to Power sector); Market-linked Pricing: Linked to global crude oil prices (e.g. Panna-Mukta Tapti gas to GAIL); Profit Sharing: Royalty + Tax only

• Phase: 1999-2012; Report: NELP
• Pricing and Profit Sharing Models: 
• Assessed Pricing: Through competitive ‘arms length’ bidding (e.g. RIL gas to NTPC). Also, administered prices continue; Market-linked Pricing: Linked to global crude oil prices (e.g. RIL gas to RNRL or gas imported from Qatar); Profit Sharing: Royalty + Tax + portion of profits (after cost is recovered by producer)

• Phase: Rangarajan Committee; Report: Final Report 2012
• Pricing and Profit Sharing Models: 
• Assessed Pricing: Discontinued; Market-linked Pricing: Linked to international ‘exchange’ traded prices in US, UK, Japan and import prices from Qatar, Nigeria, etc; Profit Sharing: Portion of revenues (from the start)
•  
• Phase: Kelkar Committee; Report: Preliminary Report 2013
• Pricing and Profit Sharing Models: 
• Assessed Pricing: Likely to remain discontinued; 
• Market-linked Pricing: Recommendations due for linking to market; Profit Sharing: Royalty + Tax + portion of profits (after cost is recovered by producer)