Fixing gas prices

Source– The post is based on the article “Fixing gas prices” published in the Business Standard on 6th December 2022.

Syllabus: GS3- Infrastructure- Energy

Relevance– Petroleum and gas sector

News– The article explains the issue of gas pricing in India.

What are the commendations of Kirit Parekh for gas pricing?

It has suggested a cap of $6.5 per million British thermal unit(btu) as a ceiling and a floor of $4 per million btu on gas supplies from ONGC and Oil India older fields. It also applies to administered price mechanism gas.

What is the current mechanism for gas price in India?

Gas prices are adjusted every six months in India in line with international pricing benchmarks.

It is pegged to oil or substitute fuels. India current gas pricing formulae are pegged to international benchmarks like US Henry Hub and Russian and Canadian domestic gas rates. It brings them close to markets.

What is the rationale behind the recommendations of this committee?

Domestic gas prices will be linked to 10% of the cost of crude oil imported into India.

The reason for altering the peg is that gas now costs more than oil. In such a situation, industries and households move to alternatives like naphtha and fuel oil.

It does not matter much in mature markets. But, in the case of India, it has invested large sums in gas transmission pipelines, LNG import terminals and city gas networks. This can become a cause of concern.

India allocates scarce APM gas to fertilizer plants and city gas facilities. It depends on imported LNG for over half its needs. This ratio will increase in the near future due to government policies.

What is the way forward for gas pricing?

Oil and gas exploration is an expensive and high-risk business. Investors expect pricing freedom and policy certainty to protect their investments.

Therefore, it is important to provide pricing freedom and policy certainty at all times.

If the government wants to prevent supernormal profits during periods of high prices, a transparent windfall tax could be an option.

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