Survey roots for market-determined pricing of natural gas

Finding faults with the one and a half year old gas pricing formula, the Economic Survey today rooted for market-determined arm's length pricing to domestically produced natural gas to incentivise investment.
The BJP government in October 2014 had approved a pricing formula that used rates prevalent in gas surplus economies like the US, Russia and Canada to price domestic gas.
Gas price according to this formula is currently USD 3.82 per million British thermal unit, which will fall to USD 3.15 in April, a rate not enough to make even state-owned firm breakeven.
"It was expected that the (October 2014) formula would balance the interest of producers and consumers in the country. However, market-determined arm's length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment and also ensure competiveness and transparency remains the first-best solution that merits consideration," the survey tabled in Parliament said.

Market-determined price, it said, would reflect the appropriate gas price in relation to alternative fuels.
"In the medium term, being a large consumer, India may be able to be a price setter for gas prices in the region," it said.

As per the new formula, gas prices are to be determined on a semi-annual basis and calculated based on a volume weighted average of rates in gas surplus nations of the US, Canada and Russia, based on the twelve-month trailing average price with a lag of three months.
Goldman Sachs in a recent report said the current gas price regime was not incentivising domestic capex sufficiently as cost for new deep-water discoveries ranges between USD 6-7 per mmBtu.

Gas price in India, it said, is lower than USD 9 per mmBtu in China, USD 10.5 in the Philippines, USD 6.5 in Indonesia and USD 8 per mmBtu in Thailand and Malaysia.
The survey wanted petroleum products and natural gas be included under the Goods and Services Tax (GST) or at least its exclusion should not be indicated in the Constitution Amendment Bill.
Also, the cess collected on domestically produced crude oil could be used to support construction of a network of gas pipelines, which is of crucial importance for providing clean energy to deprived regions of the country.

"The progress is somewhat constrained at present by having been linked to revival of fertilizer units and development of small industries in areas along the gas highway projects," it said.
Alternatively, in order to promote the gas pipeline network, Viability Gap Funding (VGF) may be provided for promoting pipeline assets creation and development of efficient markets.
Impetus, it said, is required for construction of not only cross-country pipelines but also city gas distribution.
Natural gas and LNG may be treated as declared goods to bring about tax parity with crude oil and make prices uniform across states.