The Union government has fixed the price of domestic gas at US$1.79 per million British thermal units (mmBtu) effective for six months starting October 1, 2020. This is down by about 25% from US$2.39 per mmBtu applicable to the six month period April 1, 2020 – September 30, 2020. That itself was 25% lower than the price of US$3.23 per mmBtu prevailing during October 1, 2019 – March 31, 2020. The current price is nearly half of what it was 6 month ago.
The domestic production of natural gas accounts for about 50% of the total consumption in India of about 175 million standard cubic metres a day (mmscmd), balance 50% comes from other countries and is imported as liquefied natural gas (LNG). The landed cost of imported LNG currently at less than US$3 per mmBtu is about 50% less than the level prevailing an year ago.
The fall in natural gas price is music to the consumers mainly fertilizers, power and city gas distribution (CGD) – these sectors account for 28%, 23% and 16% respectively of total gas consumption (the other important consumers are refineries 12% and petrochemicals 8%). This augurs well for the country even as the government aims to increase the share of natural gas in its energy mix from the current level of about 6% to 15% by 2030 in sync with the overarching goal of aspiring for a cleaner environment.
For fertilizers primarily urea wherein the union government controls the maximum retail price (MRP) at a low level to make it affordable to the farmers unrelated to the cost of production and distribution which is much higher, reduction in gas price will help in lowering subsidy payment and attendant sobering effect on fiscal deficit. In power also, this will help in improving the viability of gas based power plants which are hamstrung with high generation cost on the one hand and low realization from sale of power on the other (courtesy, supplies to farmers and households at subsidized rate or even free). The consumers of piped natural gas (PNG) too will pay less.
But, this has led to resentment among the domestic producers of gas such as Oil and Natural Gas Corporation (ONGC), Oil India Limited (OIL) etc. They argue that the decline in gas price will squeeze their margins. For instance, ONGC (it accounts for about 80% of the domestic gas production) avers its average output cost of US$3.7 per mmBtu is twice the current price US$1.79 per mmBtu. They have asked the government to grant higher price.
The minister for petroleum and natural gas (MPNG), Dharmendra Pradhan has promised a change in the methodology of pricing domestic gas and set up a committee to look into this.
Reportedly, an option being explored by the committee is to fix a threshold below which the price won’t be allowed to fall. What should be the floor? For determining it, the gas price could be linked to the Japan-Korea Marker (JKM) – a benchmark index used to determine LNG tariff in North Asia albeit with a discount. With JKM prices hovering over US$ 5 per mmBtu, even with US$ 1 mmBtu discount, the floor price will be close to US$ 4 mmBtu.
If, the above is taken on board, the consumers will end up paying US$ 4 mmBtu (plus transmission cost, marketing margin and taxes) from October 1, 2020 – more than twice the price they are required to pay under the existing dispensation. In fact, they would be much worse off than where they were until March 31, 2020 when they were paying US$3.23 per mmBtu. This is not the way to go.
The current pricing is based on a weighted average of gas prices at 4 international locations Henry Hub (USA), NBP (National Balancing Point) (UK), AGR (Alberta Gas Reference) (Canada) and Russian price. as per the guidelines in vogue since November 1, 2014.The price arrived in this manner – call it normal price – is applicable to all of domestic supplies from fields given under new exploration and licensing policy (NELP) as also blocks given on ‘nomination’ to ONGC and OIL under pre-NELP.
Under a special package for deep/ultra-deep, high-pressure/high-temperature fields announced in March 2016, the supplies there from are allowed a ‘premium’ price linked to the prices of alternate fuels including fuel oil, naphtha and imported LNG. This works out to more than double the normal price.
Furthermore, under a policy introduced in July 2017, supplies from fields given under the Open Acreage Licensing Policy (OALP) are eligible for market-based price which also applies to unconventional hydrocarbons such as shale gas, coal bed methane (CBM) from the fields under NELP. Besides, the supplies from marginal fields earlier with ONGC/OIL and recently auctioned to private entities are also eligible for market based price.
In short, except for fields under NELP and ‘nomination’ blocks under pre-NELP, supplies from all others are already eligible for significantly higher price, either based on alternative fuels or market-determined price. There is no valid justification for granting higher price for these so called difficult fields as these also produce more gas in turn, higher revenue even with a uniform (albeit lower) price which should help in amortizing higher capital expenses incurred in developing and commercializing them.
Yet, having pocketed higher price for supplies from those fields, the producers now want a change in the methodology of pricing even for supplies from NELP and pre-NELP ‘nomination’ blocks. This demand is without any valid basis.
First, the formula driven pricing – as encapsulated in the 2014 guidelines – is welcome shift away from erstwhile archaic system of administered pricing. The price determined in this manner is free from discretion and bureaucratic red tape. It provides a ‘stable’ and ‘conducive’ policy environment to the producers enabling them take decisions based on the price movement in the relevant 4 jurisdictions.
Second, it maintains a ‘neutral’ stance between producers and consumers. When, the price increases, producers stand to gain whereas, under a decreasing price scenario, consumers benefit. This has to be taken as a package. One can’t do cherry picking. For instance, during November 1, 2014 and September 30, 2016, the price allowed in US$ 4.24 – 5.61 per mBtu range was higher than the production cost of ONGC/OIL at US$ 3.59/3.06 per mBtu. Having quietly pocketed the surplus then, it won’t be fair for them to crib now when the price is going down based on the same formula.
Third, this price is applicable to supplies mostly from fields that are over three decades old wherein the initial investments have already been amortized. True, companies need to invest in those fields to sustain recovery but this would only be incremental. That apart, in the current recessionary situation, cost of equipment and services globally has plummeted and that should help in lowering production cost. Consequently, even at US$1.79 per mmBtu, they should be able to sustain viability of their operations.
Yet, if producers are claiming loss at this price, this is on the basis of a much higher cost say, US$3.7 per mmBtu for ONGC. This may have been over-stated by also including investment made in exploration and development of ‘new fields’ while working out the cost of supplies from existing fields. This is flawed as capital expenses on new fields can only be appropriated to supplies from those fields as and when that happens. If, that investment is excluded, the cost of supplies from existing fields will automatically decline to reasonable level.
Fourth, for the sake of argument, if minimum threshold is accepted then, in all fairness, the government should also prescribe a cap beyond which the price should not be allowed to go (for instance, in urea industry, the supplies from ‘Greenfield’ project are eligible for price linked to the import-parity price, or IMPP; but can’t go below US$305 per tone and at the same won’t exceed US$335 per tone). But, producers won’t have any interest in talking of a ceiling.
To conclude, there is no valid reason to interfere with existing formula based regime. In fact, there is dire need to do away with the several pricing formulae currently in vogue and give a uniform price on all supplies irrespective of the source.
Alternatively, the government could abolish all control on gas pricing and let the price be determined by market forces. But, today may not be the right time to do it as domestic supply being far short of demand and availability of imported LNG restricted, such a step will lead to steep increase in price. This should be kept in abeyance till such time these constraints are removed and there is ample supply.