India’s gas policy has protected the consumer from global price volatility

Source- The post is based on the article “India’s gas policy has protected the consumer from global price volatility” published in “The Indian Express” on 3rd May 2023.

Syllabus: GS 3 – Energy

News– The article explains the recently introduced APM pricing reforms.

What are the major goals of these reforms?

First, to protect Indians from extreme price volatility and to provide clarity for planned capex investments in gas-based sectors.

Second, to promote more innovation and investments in exploration and production (E&P).

What were the issues with the Domestic Gas Pricing Guidelines, 2014?

It determined APM prices based on the volume-weighted average price of gas at four international hubs. The transmission of these prices came with a significant time lag of 6 to 9 months. It contained high volatility.

For instance, the APM price between October 2020 and September 2021 remained at $1.79/MMBTU. It was below the marginal cost of production of $3.5/MMBTU for nomination fields.

However, the same APM prices jumped to $8.57/MMBTU in October 2022 due to a 400% price surge in international hub prices after the Russia-Ukraine crisis. It brought tremendous distress to the fertiliser, power and city gas distribution (CGD) sectors.

What are some facts about the APM pricing reforms and its associated benefits?

After the APM reforms, the average cost of cooking fuel for households has been reduced by about 10%. CNG vehicle owners have seen a 6-7% reduction in prices. There will be the reduction in fertiliser subsidies, expected to be more than Rs 2,000 crore each year.

These reforms will also help incentivise investment in the E&P sector by providing a floor price for mature fields of nomination. It will also incentivise new wells of nomination fields which will receive 20% higher prices.

The ceiling on production from ONGC and OIL will remain the same for the first two years. It will then increase by $0.25/MMBTU every year, to adjust for any cost inflation.

The reforms will not impact private operators of New Exploration Licensing Policy fields or High Pressure, High Temperature (HP-HT) fields. They will continue to have marketing and pricing freedom.

What are arguments against the criticism of APM price reforms?

Domestic consumers would have benefitted from the recent decrease in the US-based Henry Hub prices and Russian gas prices without these reforms.

But, current prices would have impacted APM prices only in the next pricing cycle of October 2023-March 2024. The recent change in formula ensures that the benefit to the consumers is passed on without a time lag as the price will now be determined on a monthly rather than half-yearly basis.

Some critics say that current high wellhead prices for domestic gas ensure a continued high price for LNG exports to India except for Qatar LNG. But, domestic gas prices have nothing to do with long-term LNG contracts or even spot purchases of LNG.

What are steps taken by the government for development of the gas sector?

India is aggressively expanding infrastructure for oil and gas operations. It is executing policy reforms to balance the interests of both consumers and producers.

Since 2014, India has increased the length of its gas pipeline network from 14,700 km to 22,000 km in 2023.

The number of domestic connections has increased from 22.28 lakh in 2014 to over 1.03 crore in 2023.

The number of CGD-covered districts in India has increased from 66 in 2014 to 630 in 2023 while CNG stations have gone up from 938 in 2014 to 5,283 in 2023.

India’s LNG terminal regasification capacity has increased from 21.7 MMTPA in 2014 to 42.7 MMTPA in 2023, with another 20 MTPA capacity under construction.

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