Govt changes gas pricing formula, links price to crude oil to rein in CNG, PNG prices

New Delhi: The Union Cabinet has approved on Thursday a new formula for the pricing of natural gas and has imposed a cap or a ceiling price to control the prices of Compressed Natural Gas (CNG) and piped cooking gas. Natural gas produced from legacy or old fields, known as Administered Price  Mechanism (APM) gas, and whose price is administered by the government, will now be indexed to crude oil price instead of pricing based on gas prices in surplus nations such as the US, Canada and Russia, Union I&B Miniser Anurag Thakur told the media after a meeting of the Cabinet.

APM gas to be priced at 10% of imported crude oil price

From April 1, APM gas will be priced at 10 percent of the price of the basket of crude oil that India imports (Indian basket of crude oil). The rate such arrived at however will be capped at USD 6.5 per million British thermal unit as against current gas price of USD 8.57 per mmBtu.

The price such arrived at will also have a floor of USD 4 per mmBtu. Rates will be decided every month instead of the current practice of bi-annual revision, he said.

"For the gas produced by state-run ONGC and OIL from their nomination blocks, the APM price shall be subject to a floor and a ceiling. Gas produced from new wells or well interventions in the nomination fields of ONGC & OIL, would be allowed a premium of 20 percent over the APM price. A detailed notification is being separately issued," said an official statement released by the Ministry of Petroleum and Natural Gas.

'New guidelines to ensure stable pricing regime'

The new guidelines are intended to ensure a stable pricing regime for domestic gas consumers while at the same time providing adequate protection to producers from adverse market fluctuation with incentives for enhancing production.

The government has targeted to increase the share of natural gas in the primary energy mix in India from the current 6.5 percent to 15 percent by 2030. The reforms shall help expand the consumption of natural gas and will contribute to the achievement of the target of emission reduction and net zero, said the government.

"These reforms are a continuation of the various initiatives taken by the Government of India to protect the interests of consumers by reducing the impact of increase in international gas prices on gas prices in India by significantly increasing the domestic gas allocation to City Gas Distribution sector," said the statement.

'Reforms will lead to significant decrease in PNG, CNG prices'

"The reforms will lead to significant decrease in prices of Piped Natural Gas (PNG) for households and Compressed Natural Gas (CNG) for transport. The reduced prices shall also lower the fertilizer subsidy burden and help the domestic power sector. With the provision of a floor in gas prices as well as provision for 20 percent premium for new wells, this reform will incentivise ONGC and OIL to make additional long-term investments in the upstream sector leading to greater production of natural gas and consequent reduction in import dependence of fossil fuels. The revised pricing guidelines will also promote lower carbon footprint through the growth of gas-based economy," said the government.

Currently, the domestic gas prices are determined as per the new Domestic Gas Pricing Guidelines, 2014 which were approved by the government in 2014. The 2014 pricing guidelines provided for the declaration of 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.

As the earlier guidelines based on four gas hubs had a significant time lag and very high volatility, the need for this rationalisation and reform was felt. The revised guidelines make prices linked to crude, which is a practice now followed in most industry contracts and is more relevant to our consumption basket and has deeper liquidity in global trading markets, on a realreal-timeis. With the changes now approved, data of on Indian Crude basket price from the previous month would form the basis for APM gas price determination.

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