OilMin accepts all major Kirit Parikh panel recommendations on gas pricing

Final cabinet note being prepared, but Finance Ministry yet to submit comments on key issues

The Petroleum and Natural Gas Ministry has accepted the main recommendations of the Kirit Parikh committee on natural gas pricing, and will be further recommended by them to the Cabinet soon, several officials said. The move is expected to have a significant impact on the energy sector, as the price of natural gas will likely increase.

The recommendations of moving to a purely market-determined natural gas pricing system in the next four years, and instituting a ceiling price at $6.5 MMBtu (metric million British thermal unit) and float price at $4 per MMBtu for domestic natural gas prices till then, have been accepted without any change, officials said.

The suggestion of a new pricing formula to be linked to 10 per cent of crude prices has also been approved but is pending approval by the Finance Ministry, they added.

Back in December, last year, the Committee had called for a completely free, market-determined pricing for natural gas extracted from legacy fields and the removal of all caps by January 1, 2027.

Till then, the committee has said a floor price be kept to cover the cost of gas production by Oil India (OIL) and the Oil and Natural Gas Corporation (ONGC). The cap recommended by the panel will be raised by $0.50 every year. No change in the pricing mechanism for gas produced from new and difficult fields was suggested.

It had also said the price of gas produced by state-owned firms should be linked to imported crude prices instead of benchmarking them to gas rates in international hubs - Henry Hub (US & Mexico), Alberta (Canada), National Balancing Point (European Union) and the Russian natural gas.

If accepted by the government, this could curb the sharp movements in prices witnessed recently due to geopolitical developments as has been seen in the wake of the Ukraine war. It is in this point that replies from the Finance Ministry are awaited.

"All stakeholder discussions have been completed and all relevant ministries and bodies have completed the process of submitting their comments on the issue. Replies to certain recommendations are still expected from the Finance Ministry, which we expect soon," an official said.

Cabinet approval will be needed to implement this new pricing policy because the old pricing policy is applicable till March 31, 2023.

Higher production and prices

The committee was formed to review the existing pricing formula for domestically produced natural gas in the country.

At present, the government fixes the prices of gas produced from the old fields of state-run ONGC and OIL which account for about 80 per cent of annual gas output of about 91 billion cubic metres.

The new pricing mechanism is expected to benefit domestic producers of natural gas in India, as they will now be able to receive a higher price for their product. This is expected to incentivize domestic production and lead to an increase in domestic supply.

The new pricing formula is also expected to make the pricing of natural gas more transparent and efficient, which will benefit consumers. As a result, the government would get a chance to raise the share of gas in India’s energy mix to 15 per cent by 2030 from around 6.4 per cent at present.

Almost 50 per cent of the estimated 54.6 billion cubic meters of natural gas used domestically is imported. However, user industries such as fertilizer producers may need to factor in higher costs for natural gas.

The committee was set up in September 2022 to review the gas pricing formula to ensure fair prices to consumers after state-set prices of gas from old fields and a ceiling price for output from difficult blocks rose to a record high.

The committee was tasked with evaluating the current pricing mechanism and recommending changes that would make the pricing more transparent and efficient.

Proposed Rules
Recommendations of the committee

 
Market-linked natural gas prices by Jan 2027
 
Price range for gas production from legacy and old fields till then
 
Floor price of $4/mmBtu and cap of $6.50/mmBtu for domestic gas
 
Cap price to be raised by $0.50 every year
 
Domestic gas priced at 10% of crude oil price
 
No change in gas produced from new, difficult fields