India’s Gas Pricing System
India has a complex and heterogeneous gas pricing system mainly composed of two pricing regimes viz. APM (Administrative Price Mechanism) and non-APM (aka. free market gas). The APM gas price is declared by Petroleum Planning and Analysis Cell (PPAC). The non-APM/free market gas is of two types viz. domestically produced gas from JV (Joint Venture) fields and imported gas.
Earlier, the JV gas pricing was done on the basis of a so called “Production Sharing Contract”, while for imported gas, the pricing was done under so called “Special Purchase Agreement”. This is before C. Rangarajan committee report.
The issues were created when APM gas supplies went down and non-APM gas started in volume and supply. The wide gap between the two created problems. Since APM gas was primarily given to the power producers and fertilizers producers; their demand was to be met from non-APM gas which was costlier. The Ministry of chemicals and fertilizers / Ministry of Power resisted price rise while ministry of petroleum pushed for rise in prices. The tussle continued till recent times.
Meanwhile, a CAG report alleged in 2011 that Reliance had violated the terms of contract of exploring non-APM gas in the KG Basin. The report said that the CAG used false accounting-methods to show high costs and operating expenses to keep the profit low; and increased the sale price of gas without Government’s permission from $2.34 mmBtu to $4.2 mmBtu.
The core issue in both the cases was the widening gap between APM and Non-APM pricing, however, in reliance case, it was more of profit intentions. The reliance had entered into a Production sharing contract with the government of India for exploring gas in KG Basin. Since the company needed to share profits with the government after deduction of the costs and expenses; any false inflation in cost and expenses would reduce government’s profit share.
Amid this conundrum, the UPA Government established the C Rangarajan committee to decide upon a rational formula of the gas price. This committee devised a formula on the basis of three major global benchmarks and increased the prices to $8.4 per mmbtu , double of what was fixed in Production Sharing Contract. Once Modi government was in power, it came up with New Domestic Natural Gas Pricing Guidelines, 2014 in October 2014.
New Domestic Natural Gas Pricing Guidelines, 2014
In October 2014, the Government of India notified New Domestic Natural Gas Pricing Guidelines, 2014. Under this policy, it tweaked the Rangarajan formula and came up with its own formula based on several benchmarks. This policy made it clear that price of gas will be revised every 6 months duration. With this policy in place, natural gas in the country was priced at an average price of liquefied natural gas (LNG) imports into India and benchmark global gas rates. The immediate price was $5.05 per mmbtu on gross calorific value basis and $5.61 per mmbtu on net calorific value basis, applicable from April 2014. This was much below that the Rangarajan formula price of $8.4 per mmBtu.
The pricing regime is applicable to all natural gas produced domestically, irrespective of the source, whether conventional, shale or coal-bed methane (CBM) produced in the public sector or by the private sector firms.
Current Status
The gas pricing formula as per New Domestic Natural Gas Pricing Guidelines will be applicable till March 31, 2019. The government does revision of gas prices every six months. Recently, on October 1, the government cut the price of natural gas by 18 per cent to $3.81 per million British thermal unit (mmBtu) on a gross calorific value basis from the current $4.66 per mmBtu. On a net calorific value basis, the price has been cut to $4.24 per mmBtu from $5.5 at present. This takes the price back to the level it was before the new policy came into effect.