Deregulate Natural Gas Pricing By 2027, Bring It Under GST: Kirit Parikh Committee Report

The Kirit Parikh Committee has recommended several reforms to boost investments into India's natural gas sector.

<div class="paragraphs"><p>(Source: ONGC website)</p></div>
(Source: ONGC website)

The Kirit Parikh Committee has recommended deregulation of India's administered price for natural gas by 2027, floor and ceiling rates, and several other reforms aimed at boosting investments in the cleaner fuel.

The panel suggested capping the natural gas price with a floor of $4 per million metric British thermal unit and a ceiling of $6.5 per mmBtu for the next three years, according to a report released on Nov. 30. It also suggested removal of a cap on the price of gas produced from challenging fields.

The committee, headed by the former Planning Commission member, was set up in September to streamline the multiple fiscal and pricing regimes for administered natural gas in the country. The 58-page report has been presented to the Ministry of Petroleum and Natural Gas.

The recommendations, if implemented, will provide a stable and transparent pricing outlook for the upstream entities like Oil and Natural Corp. Ltd., and Oil India Ltd., and draw rapid investments to the sector.

“The aim of the pricing policy should be to implement a market determined pricing for all the gas produced in India,” the report said. “The Committee feels that the development of a localized price discovery (India price) is important for the development of the gas market.”

This would require development of a suitable hub, either physical or virtual, for trading of spot and long-term LNG, domestic gas, coal bet methane and compressed biogas.

Pipeline infrastructure, LNG import terminals, city gas distribution, presence of various traders, buyers and sellers in the market, a gas exchange and various e-trading platforms in the country mean that the market in India is adequately developed to handle gas pricing and allocation liberalisation, the committee said.

Key Reforms Suggested By Committee

Ceiling And Floor Prices

For production from administered pricing mechanism fields of ONGC and OIL, the committee recommended a dynamic ceiling and a fixed floor price.

The first ceiling for domestic gas price should be set at $6.5 per mmBtu, and be increased by $0.5 per mmBtu every year to slowly move towards the marketing and pricing freedom for APM fields .

To protect the national oil companies from prices going below their marginal cost of production, the panel suggested a fixed floor price of $4 per mmBtu for APM gas. This is also broadly the marginal cost of production from nomination block fields, which are already very old. 

The actual price of natural gas produced from nomination fields (APM gas) shall be a dynamic price fluctuating between the floor and ceiling based on the import price of Indian Crude Basket (sourced from Platts).  

The average price of the previous months may be taken as a basis, and 10% of it as the APM price subject to the floor of $4 per mmBtu and the dynamic ceiling price. 

The price may be notified by Petroleum Planning and Analysis Cell as the APM price on the last date of the previous month, effective from the first of next month. 

For many of the operators/producers under different price regimes, the declared APM price would be the price without any floor and ceiling. Floor and dynamic ceiling prices would apply only for national oil companies' production of APM gas. 

Incentivise Additional Production

To incentivise additional production from a new well or well intervention in the nomination blocks, the committee recommended a premium of 20% over and above the APM prices for ONGC and OIL. 

The central government may consider giving marketing freedom for this additional production from new wells or well intervention in the APM fields.

The modalities for this may be finalised by the Directorate General of Hydrocarbons and approved by the Ministry of Petroleum and Natural Gas within a period of three months. 

Pass On Benefits To Consumers 

The benefit of decrease in APM prices should be passed on to the consumer. The government may advise PPAC to maintain a portal for monitoring of consumer prices with detailed break up. 

City gas distributors may be asked to upload data on the portal. The ministry may formulate exact modalities for the same. This would lead to fair prices for the CNG and PNG customers, it said. 

Staggered Exit Of APM Gas Allocation  

The current APM gas allocation policy may continue with the highest priority being given to CNG (transport) and PNG (domestic) sectors.

However, the central government may consider a staggered plan for exiting the APM gas allocation, on the lines of exit from the crude oil allocation done from Oct. 1, 2022 onwards.  

However, as the pricing and marketing freedom go hand in hand, accordingly this exit may be considered when the conditions are ripe and the government need not hand-hold the priority sectors. 

Similarly, while maintaining commitment to the priority sectors, the government may get the whole allocation process examined de novo vis-a-vis gas grid availability, current situation of the industrial and commercial consumers whose allocation orders have been quite old. 

Full Deregulation Of APM Gas Price

The price of APM and other types of gas, whose prices are set by the government, should be fully deregulated, ideally by Jan. 1, 2027, if the gas price volatility on the international market has moderated, it said. 

No Ceiling On Gas Produced From Challenging Fields 

In respect of gas produced under the marketing and pricing freedom regime of 2016 for deep-water-ultra-deep-water, high-pressure-high-temperature areas, the committee was of the view that ceiling prices serve little purpose and should be discontinued. 

However, the Association of Oil and Gas Operators (excluding ONGC) represented that it would be critical to have a smooth transition to complete marketing and pricing freedom. The committee recommended retention of the ceiling price for the time being, but also suggested that a small working group including regulators, producers and the Ministry could further fine-tune the bidding modalities. 

Even if the modalities of reckoning ceiling prices continue, the ceiling price could have a floor price equal to the dynamic ceiling price of APM gas, as defined above, to avoid the situation where the high-pressure-high-temperature ceiling price becomes lower than the dynamic price cap of the APM gas. 

Complete Pricing Freedom In Next 3-5 Years 

Pricing and marketing freedom could be ushered in soon as global energy crisis and uncertainties abate and stability is restored in the market, which is expected over the next 3-5 years as large addition to LNG capacity would ease the market.  

The gas should also be given full pricing and marketing freedom by Jan. 1, 2026 by removing the ceiling price, the report said.  

Promote Socially Desirable Use Of Gas

The committee had the following recommendations:

  • As long as the government policy regarding fertiliser subsidy continues, the committee recommends to subsidise fertiliser manufacturers as per government policy, based on the fertiliser sale price fixed by the government.  

  • Similarly, CGD entities could be subsidised for refundable deposit made by the customers at the time of initial connection of PNG to households (Rs 6,000 per connection) as per the PNGRB regulations. This could lead to faster endorsement of the connection by potential customers.  

Government May Free Power Producers Of Take-Or-Pay Contracts 

There are power producers who were promised priority allocation of gas, and whose cost of generation has become uncompetitive due to dramatic reduction in cost of renewable power.

These producers have a take-or-pay commercial obligation under the gas supply agreement with GAIL or ONGC. To protect them, the government may consider issuing suitable advisory to free them from take-or-pay obligation.

Develop Localised Price Discovery Mechanism  

Once there is pricing freedom, it would be necessary to develop a localised price discovery (India price) mechanism for the development of the gas market.

This would require development of a suitable hub (physical or virtual) for trading and competition between spot, long-term LNG, domestic gas, coalbed methane, and compressed bio gas on approved gas exchanges.

The government may consider some spot gas purchases of even fertiliser units—initially on a pilot basis—on IGX or any other approved exchange, which is currently being procured through Empowered Pool Management Committee mechanism.  

Gas Should Be Brought Under GST 

The committee recommended that gas should be brought under the GST regime. The committee recognised that this would require consensus among the states.

To obtain this, if need be, the states may be compensated for five years for any loss in revenue. The process of getting the needed consensus should be initiated now, it said.

Also, till the time the GST regime is implemented, the government may consider moderating the central excise duty rate on CNG, to reduce the burden of higher natural gas costs on consumers.

According to the committee, this is the ideal long-term policy, since all stakeholders' interests—APM gas producers and protected consumers—are protected and since the impact on the government finances is positive.