The government implemented changes to the pricing model of domestic natural gas in accordance with the Kirit Parikh committee’s recommendations on gas pricing. The new pricing system will announce prices monthly and link them to 10% of the international price of the Indian crude basket. As a result, prices for piped natural gas (PNG) and compressed natural gas (CNG) used by households, auto fuel, and various industries are expected to decrease by 10%.
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Key recommendations of Kirit Parikh panel on natural gas pricing:
The government has accepted all the significant recommendations of the Parikh panel and has established a floor price of $4 per MMBtu for the next two years to cover the cost of gas production by state-run companies ONGC and Oil India Ltd. Additionally, a ceiling price of $6.5 per MMBtu has been set.
The Union Cabinet approved significant changes in the pricing regime for domestic natural gas under the ambit of the Administered price mechanism (APM).
- Under the APM, the Indian government sets the price of natural gas produced by oil and gas companies.
- 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.
- These changes will mainly apply to gas produced by legacy fields, or nomination fields, of national oil companies Oil and Natural Gas Corporation (ONGC) Ltd and Oil India Ltd (OIL).
- 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.
Significance of this development:
- APM gas price prices linked to crude oil prices
- The new regime will have the APM gas price prices linked to crude oil prices.
- This has now become the prevalent practice in most natural gas contracts internationally.
- It is more relevant to India’s consumption basket, and has deeper liquidity in global trading markets on a real-time basis.
- Addressed the issue of time lag
- With the changes in the pricing formula, data of the Indian crude basket price from the previous month would form the basis for APM gas price determination.
- Attempt to balance demands of consumers as well as producers
- 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 had been urging the government to ensure affordability of domestic natural gas.
- Hence, by bringing ceiling and floor price, it attempts to bring a balance.
- Significant decrease in prices of PNG and CNG
- The 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.
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