Niti Aayog-led panel is considering applying free market economics to gas pricing

New Delhi: To boost domestic output, a panel headed by Niti Aayog Vice Chairman Rajiv Kumar is mulling applying the principles of a free market economy to gas pricing in India. The oil ministry is believed to have told the panel that it's necessary to bring in such a pricing mechanism as it will help companies such as ONGC, Reliance Industries and Vedanta significantly step up production.

Move aimed at improving domestic natural gas output

"The government is clear local production must rise. Our energy requirement is rising and if we fail to raise output, our import dependence will go up," said an official, requesting not to be named because he was authorised to speak to the media. "If prices are an obstacle, we must overcome this."

But he also warned of likely hurdles: "An election year has its own challenges. It can test a government's resolve on key matters. There is a fear the matter can get politicised and the plan may get stuck." The oil ministry had previously batted for allowing all local gas to trade on a soon-to-launch exchange so that market rates are discovered.

How does the current pricing mechanism work?

If the proposal gets a nod from the Cabinet, it will do away with the current pricing formula that is often blamed for under-exploration of the country's gas fields and declining output.

The current mechanism is based on a four-year-old formula that makes use of the average rates from global trading hubs to determine domestic prices twice a year. The prices are often too low to attract investments in the upstream sector.

Producers can charge market rates for gas produced from deep sea and other fields where extraction of gas poses difficulties but rates must below a ceiling fixed by the government.

The backdrop

When oil prices skyrocketed in October and a depreciating rupee pushed India's oil import bills, the government was forced to take note of the country's declining oil output. That's when the panel was set up and tasked with recommending steps to vitalise India's exploration and production sector.

It comprises of the Niti Aayog vice chairman, its CEO Amitabh Kant, the Cabinet secretary, economic affairs secretary Subhash Chandra Garg, petroleum secretary MM Kutty and ONGC chairman Shashi Shanker. It is expected to submit a report on the same to the PMO shortly.

The committee is in consultation with state-owned and private sector producers, the regulator, service providers and other stakeholders to prepare a blueprint for boosting local output.