Gas sector confident of smooth transition as it awaits new pricing rules

Officials said existing APM gas prices have been left broadly unchanged till Sept 31 as a temporary arrangement

India's gas industry continues to wait anxiously for the government to take a call on the Kirit Parikh Committee's recommendations on gas pricing in India, but remains confident of a smooth transition. Meanwhile, officials said gas prices under the existing Administrative Price Mechanism have been kept unchanged in the April 1-September 31, 2023 period as part of the government's bi-annual practice.

The Parikh Committee report has major implications for City Gas Distribution (CGD) companies, which establish and run an interconnected system of underground pipelines for supplying Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) to domestic-commercial and industrial customers.

"If implemented, this move would be positive for downstream companies such as IGL, MGL and Gujarat Gas, and marginally negative for ONGC (neutral for RIL). We expect lower sourcing costs ($6-8 per standard cubic metre) to benefit the CGDs on the margin front to an extent and rest be passed onto to customers (raising lucrativeness of CNG, PNG over alternate fuels)," a report by ICICI Direct Research has said.

As a result, CGDs remain anxious, but hopeful of minimal disruption.

"We are used to doing business in an environment of uncertainty when it comes to government regulations. We hope the notification for the new regime, whenever it comes, will be clear so that the transition is smooth. It should also have a retrospective clause covering transactions made from April 1, this year," a senior executive of a Punjab-based CGD company said.

Another executive from a Maharashtra-based CGD said the government has held repeated discussions with CGDs over the past few months on the issue, and assured of all support in the aftermath of a change in the price regime.

Prices kept unchanged

Officials said the administered prices of natural gas produced from legacy or old fields has been left unchanged at $8.57 per million British thermal units, they said. The rate for the fuel from newer but difficult fields such as one operated by Reliance Industries and its partner BP in the KG basin have been cut marginally to USD 12.12 per mmBtu.

Officials said the temporary measure would act as a stop-gap arrangement until the recommendations of the Parikh committee is officially adopted. The latest change in APM prices have therefore been in stark contrast to October 1, 2022 when natural gas prices were increased by 40 per cent, they pointed out.

In its widely anticipated report to the government, the Kirit Parikh committee has said India should have a completely free and market determined pricing for natural gas extracted from legacy fields and remove all caps by January 1, 2027.

Till then, the committee has suggested a floor price of $4 per MMBtu (Metric Million British Thermal Unit) be kept in place to cover the cost of gas production by state-run firms ONGC Ltd and OIL Ltd. A ceiling price of $6.5 per MMBtu has also been recommended, which may be increased yearly by about $0.5 per MMBtu till 2027.

Meanwhile, the report calls for not tinkering with the existing pricing formula for difficult fields such as KG-D6 of Reliance Industries and BP PLC. About 83.3 percent of India's natural gas is produced by ONGC Ltd and OIL Ltd, while the remaining 16.7 percent was by private companies and joint venture entities.

Entire ecosystem waiting

Natural gas production in the country has been rising fast, clocking 90.1 Million Metric Standard Cubic Meter per Day (MMSCMD), according to government data. As of 2018-19, offshore production had a share of about 67.3 percent. The remaining natural gas production including Coal Bed Methane was concentrated in Assam (10 percent), Tripura (5 percent), Rajasthan (5 percent), Gujarat (4 percent), Tamil Nadu (4 percent), Andhra Pradesh (3 percent), and Jharkhand, Madhya Pradesh and West Bengal together making up 2 percent.

Through its nationwide pipeline infrastructure, state-owned GAIL (India) Ltd supplies the natural gas to CGDs based on a system of allocation to CGDs which is implemented on a three-month basis. "There will have to be major changes in our supply mechanism once the new regime comes. We are in touch with the government on the issue and have assured them of a quick change in the mechanism, whenever it is mandated," a senior official from GAIL said.

Till 2022, city gas entities were allocated natural gas from older fields, called the regulated or APM gas. But last year, the Petroleum and Natural Gas Ministry modified its gas allocation policy, allowing GAIL to import gas and buy from newer domestic fields to meet growing demand from households and the transport sector.

GAIL now pools or averages out the price of imported as well as newer field gas with the lower-priced regulated field gas to supply to city gas entities for sale as CNG to automobiles and piped natural gas to households, a ministry order said.