All you wanted to know about: Gas Pricing Formula
Last week, local gas producers had reason to feel queasy. The government marked down the price for their produce by 8 per cent. This was based on the new pricing formula put in place by the NDA government last October. The formula has also been the bone of contention between Reliance Industries and the Centre.
What is it?
Unlike its cousin crude oil, the price of natural gas in India is not market-determined. The domestic gas price is the weighted average price of four global benchmarks — the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas. The domestic price is based on the benchmark prices in the prior year and kicks in with a quarter’s lag. It applies for six months. So, the price applicable from April 1 to September 30, 2015 is based on benchmark prices from January to December 2014.
The price for November 2014 to March 2015 was $5.61 an mmBtu. As global gas prices have been slipping over the last year, the domestic price, revised last week, also took a knock down to $5.18 an mmBtu. Interestingly, the pricing guidelines do not take into account the price of gas imported.
Gas prices in Asia are typically higher than other global benchmarks due to the demand-supply dynamics in the geography. But the government (mysterious are its ways) decided to give the go-by to them. They were part of the pricing formula proposed earlier by the Rangarajan Committee which recommended a price of about $8.4 an mmBtu last April.
Why is it important?
Natural gas demand in the country runs far ahead of supply. India imports nearly a quarter of its needs but fails to meet demand. This is due to insufficient domestic gas production and full utilisation of existing import capacity. Remunerative, market-linked price is important to encourage domestic gas production. Imported gas price, which has fallen over the last year, is still at twice the domestic gas price. In the coming years, if domestic output does not increase and the dependence on imported gas rises, the country may end up paying more.
ONGC and Oil India, which account for more than three-fourth of domestic gas production, sometimes grumble about low prices, but mostly choose to grin and bear with the government. Private sector biggie Reliance Industries, which over-promised and under-delivered on the gas output from the KG-D6 field, has been vociferous about the need for market-linked pricing for gas.
Gas pricing is a hot potato. Technically, the government is the owner of the resource and has been allowed by the Supreme Court to fix the price. Also, gas is a key input in sectors such as fertilisers, power and city gas distribution. Higher prices will raise the cost for these politically sensitive products.
Why should I care?
The gas pricing formula does not apply to those of us who use LPG cylinders. But lower domestic gas prices do lower prices for the piped natural gas (PNG) heating kitchen stoves and the compressed natural gas (CNG) fuelling vehicles.
Delhi-based Indraprastha Gas cut the price of PNG and CNG by 60 paise a kg soon after the domestic gas price was slashed. Low gas price could also lower your electricity bill and cut the government’s fertiliser subsidy.
Between balancing the interest of consumers and producers, the government walks a tight-rope on gas pricing.