India's new gas pricing regime balances interest of consumers, producers
The Indian government on April 6 revised the pricing guidelines for locally produced gas. The government's decision is based on the recommendations of an expert panel chaired by economist Kirit Parikh, which submitted its report in November last year.
As per the new formula, the price of the gas produced domestically will be 10% of the monthly average of the Indian crude basket and notified on a monthly basis. The gas price will, however, have a floor of $4/mn Btu and a cap of $6.5/mn Btu. Gas produced from new wells of state-owned explorers ONGC and Oil India (OIL) would be allowed a premium of 20% over the administered price (APM).
Analysts and industry stakeholders say that the new pricing formula takes into account the interest of both consumers and producers.
“APM price as per the new formula has moderated by about 20% providing relief to consumers, while also providing downward protection to upstream producers' cashflows in the form of floor price. The new pricing formula presents a fine balance between the interest of consumers as well as natural gas producers,” Prashant Vasisht, vice president & co-group head - corporate ratings, ICRA said.
Under the previous pricing regime, domestic gas prices were determined as per the pricing guidelines devised by the C. Rangarajan committee and approved by the government in 2014. The 2014 pricing guidelines provided for declaration for domestic gas prices for a six-month period based on the volume-weighted prices prevailing at four gas trading hubs - Henry Hub, Albena, National Balancing Point (UK), and Russia for a period of 12 months and a time lag of a quarter.
The APM gas prices as determined by the Rangarajan committee had remained significantly lower in the past due to low prices at global gas hubs like Henry Hub, National Balancing Point (NBP), UK, etc.
“The new guidelines aim to establish a stable pricing regime for domestic gas consumers while providing sufficient protection to producers from adverse market fluctuations, along with incentives to user industries and CGD [city gas distribution] sector. It will accelerate the expansion of CNG and piped natural gas (PNG) as a preferred fuel, and will also contribute to reducing the carbon footprint,” Gail, India’s biggest gas marketing firm, said in a statement.
Rajesh Kumar Mediratta, CEO of Indian Gas Exchange, said this is a welcome move for the sector and will facilitate the Indian government’s vision of increasing the share of natural gas to 15% in the country’s energy mix by 2030.
"These reforms will lead to lowering of CNG and PNG pricing by the CGD companies, thus benefitting the end consumers. This may help push the demand for CNG for vehicles and PNG for households," Mediratta said. "Further, fixing the upper cap of prices to $6.5/mn Btu will shield the CGD companies from price volatility and encourage demand. This move is in line with the government’s aim to transition towards cleaner fuels, away from the more polluting fuels such as petrol, diesel or LPG."
He said that rise in gas demand will also help expand spot markets eventually and that will help boost liquidity on Indian Gas Exchange.
Sharp cut in piped gas and CNG prices
With the new pricing regime coming into effect, CGD companies have reduced prices of PNG that is supplied to households and commercial establishments and CNG that is used by the transportation sector.
Gail Gas, a unit of state-owned Gail, has reduced the domestic PNG prices by 7 rupees/m3 in Bengaluru and Dakshin Kannada and by 6 rupees/m3 in all its other geographical areas. The new effective domestic PNG prices are 52.50/m3 in Dewas, Meerut, Sonipat, Taj Trapezium Zone, Raisen, Mirzapur, Dhanbad, Adityapur and Rourkela and 51.50 rupees/m3 for Bengaluru and Dakshin Kannada.
Similarly, CNG prices are reduced by 7 rupees/kg in Karnataka and Sonipat and by 6 rupees/ kg in rest of its geographical areas. Gail Gas operates in 16 geographical areas across the country.
Adani Total Gas, another major player in CGD space, reduced the price of CNG by up to 8.13 rupees/kg and PNG by up to 5.06 rupees/kg. The new reduced price is applicable in all the geographical areas across India where the company operates.
The company has also reduced PNG prices for its industrial and commercial consumers by 3 rupees/m3 across Ahmedabad, Vadodara, Faridabad, Khurja and Palwal.
“Adani Total Gas believes that the government’s step to revise the gas price will act as a growth catalyst and aid in the rapid PNG and CNG conversions, increasing the share of natural gas in India’s energy basket from 6.5% to 15% by 2030,” the company said.
Adani Total Gas is one of the largest CGD private listed companies currently supplying CNG and PNG to about 700,000 domestic, 4,000 commercial and 2,000 industrial customers and over 300,000 CNG users across our 460 CNG stations in India.
Vasisht of ICRA believes that downward revision in CNG prices will increase the competitiveness of CNG vehicles against ICE vehicles which should aid adoption of CNG vehicles. “Vehicle conversions had been impacted by the run up in the prices of CNG which should now recover to some extent,” he said.
Mixed bag for Indian upstream
As per the new pricing formula, the ceiling price of $6.5/mn Btu is lower than the previous administered price of $8.57/mn Btu. According to ICRA’s calculation, in absence of the revision in gas pricing, the gas price as per the old formula would have been around $10-11/mn Btu and this capping has resulted in a negative impact for ONGC and OIL.
“However, the floor for the gas prices has been kept at $4/mn Btu, which is higher than the historical averages as well as the cost of production,” Vashist said.
“Moreover, for gas produced from new wells in the nomination fields of OIL and ONGC would be allowed a premium of 20% over the APM price, which also gives an incentive to these upstream players to undertake capex. Furthermore, the prices are expected to be around the levels close to the ceiling, which are likely to remain remunerative and will keep the capex plans of these upstream companies intact,” he added.