By R. Sasankan

Global crude oil prices have been going through the roof once again. Curiously, domestic natural gas prices have also been spiralling upwards without drawing the same kind of obsessive attention or hand-wringing despair. On October 1, prices of domestically-produced natural gas were raised by 40 per cent to an all-time high. This is the third increase in rates since April 2019.

Gas pricing in India has always been a bit of a conundrum. Normally, demand-supply dynamics should influence the price of such a vital product. But India’s energy pundits have been revising the gas prices every six months using a formula based on the weighted average price of four global benchmarks: the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas.

Natural gas is mainly used in India to generate electricity and produce fertilisers. It is also converted into CNG to run automobiles and PNG for cooking fuel. The latest increase in natural gas prices will stoke inflation even though it will not have the same kind of cascading impact that the increase in petrol and diesel prices can conjure.

The war in Ukraine has been pushing up prices of crude oil and natural gas everywhere. There has been a massive increase in the price of gas at all the major trading hubs between July 2021 and August 2022. The Henry Hub price in the US has shot up by 140 per cent during this period. The JKM Marker – which represents the Northeast Asian spot price index for LNG delivered ex-ship to Japan and Korea and is assessed by S&P Global Platts -- registered an increase of almost 257 per cent. The NBP in the UK has increased by 281 per cent. In comparison, prices of CNG and PNG in India went up by only 71 per cent.

 India has been reasonably successful in mitigating the volatility in global crude and gas prices through a series of measures. However, the natural gas price hike announced on October 1 goes against the grain of logic embedded in such a sensible approach.

Pricing issues in the country are invariably decided based on the recommendations of some government-appointed committees, which are usually packed by people who are perceived to be experts in certain areas. The sad truth is that many of these experts sport a halo of authority often tarnished by the grime of intellectual dishonesty. These experts are invariably promoted by different lobbies that work tirelessly to get them appointed into official committees. There is a quid pro quo arrangement. These experts, in turn, take care of the interests of their promoters. This leads to a situation where national interest is badly compromised. There have been a few exceptions where experts have presented dissenting notes on contentious issues. But this is rare. The more troubling aspect of this mutually-beneficial arrangement is that people with little or no competence in a particular area decide critical pricing issues leading to bad outcomes.

It was the Rangarajan committee which recommended that the domestic gas price should be indexed to international benchmarks after scrapping the earlier administered pricing mechanism. The UPA government had almost succeeded in passing the Rangarajan formula a few weeks before the 2014 elections. The Modi government adopted a revised – much improved but still flawed – formula within six months of coming to power.

The government has now appointed a new committee under energy expert Kirit Parikh to review the current pricing formula for domestically-produced gas. The latest price hike announced on October 1 has not been influenced by the views of this committee.

There is a fundamental flaw in the use of a weighted average of international benchmarks to fix the price of natural gas in India. Gas hub prices prevailing worldwide have no relationship to the cost of producing gas in India or anywhere else in the world because, unlike crude oil, there is no global gas market. An almost perfect competitive gas market only exists in North America. The price of gas has risen worldwide only because Russian supplies (mainly via pipelines to Europe) have been severely constrained or reduced due to the war in Ukraine. This cannot become the overwhelming reason to raise the price of domestic gas produced in India, especially from nominated fields. In all fairness though, let us also note that the same formula yielded much lower prices a few years ago for domestic gas in India.

Natural gas is not an internationally traded commodity like crude oil and hence there is no such concept as an international price. This explains why North American gas prices remain in the $7.50- $9.50 per MMBTU range at a time when prices at the European hubs are upwards of $50/MMBTU. Even LNG exported from the same source to different end consumers, before the Ukrainian war, varied by a factor of two or more. Gas prices will return to normal levels overnight if Russian gas supplies are restored.

I do not rule out the possibility of the new committee using the current turmoil in the gas market to justify an unwarranted high price for domestic gas.

The share of natural gas in India’s energy mix is still around 6.2 per cent. Three years ago, Prime Minister Modi announced his government’s intention to revise the energy mix, raising the natural gas component in the mix to 15 per cent by 2030. There is just one hurdle to attaining that goal. The Indian market is extremely price sensitive. The country’s LNG import goes down whenever the spot LNG prices surge. Unless the gas price remains stable and affordable, the target of 15 per cent may not be achieved even by 2040.