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Press Release [FREE Access]
Petro Intelligence » Gas Pricing Report: Burden Falls On The Public Sector

By R. Sasankan

The buzz of eager anticipation that had preceded the submission of the Kirit Parikh panel’s recommendation on natural gas pricing appears to have somewhat dissipated – more by the confusion over the report’s intent than any major bickering over the suggestions themselves.

But first a caveat: I do feel more than a little squeamish about commenting on a report that hasn’t yet been placed in the public domain. All we have is a few driblets of information about the major recommendations without the benefit of the justifications and arguments that Mr Parikh and his cohorts made while suggesting a course of action. To that extent, this article will suffer from the limitations that are inherent in a peek-a-boo revelation. The government has also given no indication when – and if at all – it intends to make that report available for an extensive discourse.

It does seem a little odd to discuss the recommendations without actually reading the report. But there is a reason why we must make that effort. The government is expected to take a decision on the recommendations of the committee without delay.

Kirit Parikh is a seasoned energy expert who served the previous United Progressive Alliance (UPA) government headed by Manmohan Singh. He was considered to be very close to Dr Singh. Mr Narendra Modi, the current Prime Minister, usually steers clear of people who have been associated with the previous regime. But he seems to have reposed great faith in Parikh. They have one thing in common: both hail from the state of Gujarat.

Mr Modi and the BJP have proved to be extremely adroit in bucking the burden of incumbency and the latest results in the Gujarat Assembly elections bears testimony to this fact. But a ruling party facing a general election in 2024 cannot afford a situation where it exercises no control over high energy prices. The government controls the entire supply chain – from production to allocation of natural gas and also fixes the pricing. A government decision on pricing and allocation priorities of natural gas will have greater legitimacy if it based on the recommendations of an official committee.

Before going into the merits of the report, let us take a close look at its major recommendations.

Parikh Panel Recommendations

  • Recommended price band of US$ 4 to 6.50 per unit for gas from old legacy field.
  • Ceiling rate for gas from legacy fields to be raised by US$ 0.50 per mmBTU every year.
  • Market-determined gas pricing for legacy fields by January 1, 2027.
  • No change in existing price formula for fields in difficult geology like Reliance Industries’
  • KG-D6.
  • Currently, fields in deep sea, high temperature, high-pressure zones are governed by a different formula that includes an element of imported LNG cost. However, they are subject to a price ceiling of US$ 12.46.
  • Panel recommended providing such ‘difficult’ fields with complete pricing freedom from January 1, 2026 and removing the cap.
  • Recommended including natural gas in the GST regime by subsuming excise duty charged by the Centre and the VAT levied by the states.
  • Recommended moderation in excise duty rate.
  • To address states’ concerns of revenue loss, it recommended a mechanism similar to the 5-year compensation cess in the GST regime.

Well-known energy experts have declined to formally comment on the recommendations in the absence of the full report. But equity research organisations and stock market players have scrambled to air their comments as they tried to assess what impact these suggestions would have on the stock markets if they were accepted in toto.

In the short term, a price cap is seen as positive for CGDs which stand to benefit from lower domestic and spot LNG prices based on current market price. However, the benefit of the decrease in APM gas price will have to be passed on to the consumers and, hence, the margins of CGDs may not rise. "We believe (that) capping of domestic APM gas price at $6.5 per mmBtu, which is lower than current APM gas price of $8.57 per mmBtu, is positive for the CGD sector in the near to medium term," said JM Financial.

Kotak Institutional Equities said that even at a price of $ 6.5/mmBtu, APM gas is unaffordable for price-sensitive segments such as power and CGDs. The reports suggestion to raise the ceiling by $ 0.5 per mmBtu every year only deepens the problem.

This then prompts us to ask a bald question: Has Dr Parikh done justice to the subject of natural gas pricing?

A journalist cannot field such a sensitive question. Having covered India’s oil and gas sector for many years, I have the advantage of knowing many energy experts. I did phone up some of these experts and they spoke to me briefly on the condition that they would not be quoted.

The first point that they make is that the report does not do great credit to Dr Parikh’s brilliance as an energy expert. They contend that it is hard to see the economic logic that underpins the report as it only serves to milk the public sector in order to please a section of the consumers at an opportune time. The suggestion to bring natural gas within the GST regime is sensible but not new. After all, there has been a long-standing demand to bring the entire oil and gas sector under the GST regime.

First, they point out, only LNG is sold in the world with a linkage to crude prices. Natural gas and LNG are two separate commodities and there is no "market price" for natural gas in the world except in North America where gas-on-gas competition exists among multiple players operating in an environment that ensures supply-demand balance because of a robust transportation, distribution and storage network governed by an independent regulatory regime.

Based on the suggested linkage of natural gas to price of oil, they believe that the floor and ceiling prices suggested for the public sector's nominated fields translate to a crude equivalent price of $ 23.2/barrel and $ 37.7/barrel respectively. Surely, Dr Parikh knows that both these are arbitrary levels that are well below prevailing crude prices. The floor and ceiling rates only penalize ONGC and OIL as they are the only ones which operate nominated gas fields. If the recommendation is accepted, the APM gas price for ONGC and OIL will tumble to $ 6.5/MMBTU from the reported current price of $ 8.57/MMBTU. The 24.2 per cent loss on the sale of APM gas will have to be absorbed by ONGC and OIL. Clearly, Dr Parikh knew this was unfair; otherwise there can be no justification for throwing a few crumbs to ONGC and OIL in the form of an arbitrary $ 0.5 annual increase in the ceiling price.

The report raises the prospect for complete pricing freedom from January 1, 2027 – in effect kicking the can further down the road. It is not clear how this “market price” will be determined in India that has no natural gas market. The report suggests that natural gas prices in India should be linked to crude oil from January 1, 2027, just like LNG, with a floor and a ceiling. Surely, Dr. Parikh knows that natural gas and LNG are two separate commodities and no country prices natural gas on this basis. To illustrate this point, at $ 80/barrel, the price of natural gas will translate to $ 13.80/MMBTU!

And what sort of marketing freedom is Dr Parikh really alluding to under the Production Sharing Contracts? During the UPA regime, the Government of India had successfully argued before the Supreme Court that the oil and gas extracted from the concessions awarded under various rounds of NELP auctions ought to be regarded as a national resource. Further, the Government had successfully argued that the upstream E&P concessionaires were mere operators and had no right to price the national resource of oil and gas that they extracted.

Finally, there is no universal definition to determine what constitutes a "difficult field". By retaining the current gas pricing formula for all NELP concessionaires and removing the ceiling on the price of natural gas from "difficult fields" (without defining what that means in the Indian context), Dr Parikh ensures that the LNG prices for India remain in the $ 14 plus range except for the LNG sourced from Qatar under Petronet LNG’s contract with that country.

It is obvious that something has gone wrong somewhere. The government should, therefore, place the full report in the public domain and invite comments from known experts on natural gas pricing.



To download the latest issue 'Volume 29 Issue 20 - January 25, 2023', click here
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