Changes in domestic gas pricing formula: Math, rationale, and how consumers are affected

Source: The post is based on the article “Changes in domestic gas pricing formula: Math, rationale, and how consumers are affected” published in Indian Express on 8th April 2023

What is the News?

The Union Cabinet has approved a revision in the formula for the pricing of natural gas.

What is the revised natural gas pricing formula?

Natural gas produced from legacy or old fields, known as APM gas, will now be indexed to the price of imported crude oil instead of benchmarking it to gas prices in four surplus nations such as the US, Canada and Russia.

APM gas will be priced at 10% of the price of a basket of crude oil that India imports (Indian basket of crude oil). 

The rate arrived at however will be capped at $6.5 per million British thermal unit. There will also be a floor or base price of $4 per mmBtu.

What are legacy or nomination fields?

Nomination fields are acreages that the government awarded to ONGC and OIL before 1999, after which auctions became the basis of awarding oil and gas blocks. 

The price of APM gas, which accounts for about two-thirds of India’s natural gas production, has been determined as per the ‘modified’ Rangarajan formula since November 1, 2014.

What is the impact of this decision?

Firstly, the new regime will have the APM gas price linked to crude oil prices. This has now become the prevalent practice in most natural gas contracts internationally.

Secondly, with the changes in the pricing formula, data on the Indian crude basket price from the previous month would form the basis for APM gas price determination.

Thirdly, over the past few years, ONGC and OIL had been petitioning the government for a floor price as they were forced to sell gas at a loss for a prolonged period when prices sustained below their cost of production.

– On the other hand, gas-consuming industries have been urging the government to ensure the affordability of domestic natural gas. Hence, by bringing ceiling and floor prices, it attempts to bring a balance.

Fourthly, these reforms will lead to a significant decrease in prices of Piped Natural Gas (PNG) for households and Compressed Natural Gas (CNG) for transport. The reduced prices shall also lower the fertilizer subsidy burden and help the domestic power sector.