The recently released Kirit Parikh Committee recommendations on India's natural gas pricing would help balance both local consumer and producer interests, as the country advances to become a gas-based economy but some uncertainty remains, industry sources observed.
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These measures will not only provide a cushion to the earnings of those producing gas below the cost of production for a long time but would also boost investments in the sector, he said.
India aspires to become a gas-based economy with the share of natural gas in its primary energy mix targeted to rise to 15% by 2030 from the existing level of around 6.3%.
The committee has recommended a $4-$6.50/MMBtu price band for its main domestically produced gas, until a full deregulation of prices is implemented in 2027, according to a copy of the report seen by S&P Global Commodity Insights.
The price band was suggested for current production from the fields of national oil companies like Oil & Natural Gas Corp. and Oil India Ltd., which are currently under the administered price mechanism, or APM.
The $6.50/MMBtu ceiling should be increased by 50 cents/MMBtu every year to slowly move toward the marketing and pricing freedom for APM fields, the report said.
To incentivize additional production from a new well or well intervention in the nomination blocks, the committee said a premium of 20% over and above the APM prices for ONGC and OIL may be granted till complete freedom is given by the central government for the new APM production.
APM gas fields were allotted to ONGC and OIL before 1999. Production from these fields do not attract profit-sharing with the government, and their pricing formula is benchmarked to gas prices at specified international gas hubs every six months based on the weighted average price.
"How the government implements the recommendations remains to be seen," an Indian trader said, noting that unlike state-owned companies, private companies won't likely be affected by ceiling prices.
Other aspects
Meanwhile, the interests of consumers will also be protected through the imposition of a ceiling as they grapple with soaring inflation, rising costs of transportation for gas-based mobility and piped cooking gas for households, the industry source said.
The current changes in the price regime are clearly to support India's growing City Gas Distribution, or CGD sector, said Ayush Agarwal, an LNG analyst at S&P Global.
However, more needs to be done to incentivize gas consumption in the power sector, without which achieving the goal of 15% share in India's energy mix is at significant risk, he said.
APM gas is allotted to vulnerable sectors with the power sector allocated 34% in 2021-22, 17% allotted to the fertilizer industry, which impacts food prices, 22% to the city gas sector and the remaining to other sectors like petrochemicals and machinery.
Fertilizer units, which also rely on natural gas as a feedstock for nitrogen-based fertilizers and LNG imports, are still mulling over their requirements to source gas and optimize costs as they expect December prices to also be too high, the trader said.
"We were hopeful to switch from alternative fuels to LNG when prices went below $20/MMBtu, but prices rebounded to over $30/MMBtu...So it is completely uneconomical to do so now," he added.
Platts JKM for January was assessed at $38.075/MMBtu Dec. 1, data from S&P Global showed.
For the April-October period, LNG imports fell 11.2% on the year to 16.88 Bcm, due to lower local demand for natural gas from user industries such as power, fertilizer, and CGD entities, Petroleum Planning and Analysis Cell data showed.
For the April-October period, India produced 20.1 Bcm of natural gas, up 0.9% on the year, while the country produced 34.02 Bcm of natural gas in FY 2021-22, up 18.7% on the year.
Meanwhile, the committee has also recommended that fertilizer plants should be allowed to purchase spot gas from outside of the EPMC tender.
This is in line with the recent government announcement of procuring spot gas outside of the EPMC tender for Q4 2022, where the bidders have quoted the price between $40/MMBtu and $62/MMBtu, Agarwal said. However, the spot LNG prices have normalized close to $35/MMBtu since then, Agrawal said.
"The ceiling prices are expected to reach the current price levels of $8.57/MMBtu not before FY 2027, and by then, crude prices are expected to normalize, which will largely keep the APM prices between $6-$7/MMBtu in the mid-term," he said.
"The JKM prices are expected to stay above $12/MMBtu through 2028, roughly double of APM prices. Hence, the complete deregulation of prices by January 2027 looks tough," Agrawal added.
The committee also recommended that gas should be brought under the Goods and Services Tax, or GST, regime.
Having a common taxation such as GST for gas in lieu of state level VATs, which vary from 3% to as high as 24%, will be positive for the market but a few states don't favor it, another industry source said. "So, getting consensus may take time."