India revises gas pricing mechanism with link to crude

Market: Natural gas
07/04/23

India has approved a revised natural gas pricing mechanism under which domestically produced gas will be benchmarked to 10pc of global crude prices and revised every month, effective from 8 April.

The new pricing formula includes a floor price set at $4/mn Btu and a ceiling price set at $6.50/mn Btu for conventional gas from older fields like those operated by state-controlled ONGC and Oil India.

These prices will be revised every month. The ceiling price will remain in place for the next two years and will rise by $0.25/mn Btu each year after that, information and broadcasting minister Anurag Thakur said on 6 April when the Cabinet Committee on Economics Affairs chaired by prime minister Narendra Modi approved the mechanism.

"The reforms will lead to significant decrease in prices of piped natural gas (PNG) for households and compressed natural gas (CNG) for transport," India's oil ministry said. "The reduced prices shall also lower the fertilizer subsidy burden and help the domestic power sector."

Domestic gas prices are currently linked to US Henry Hub, the UK's NBP and Canadian and Russian prices and are revised every six months. The new mechanism adopted some of the key recommendations made by the government-appointed Kirit Parikh panel that was set up to deregulate gas prices in the country.

India's Petroleum and Natural Gas Regulatory Board last week decided to keep prices of conventional gas produced by state-controlled firms unchanged at $8.57/mn Btu for April-September, while prices of gas produced from difficult fields were set marginally lower at $12.12/mn Btu.

ONGC and Oil India will sell gas from their old fields at $6.50/mn Btu this month under the new pricing mechanism. But the new pricing will not apply to gas from difficult fields. Difficult fields refer to gas produced from deepwater, ultra-deepwater, high-temperature and high-pressure areas like the western offshore and Krishna-Godavari (KG) basins.

Gas produced from new wells or well interventions at ONGC and Oil India's nomination fields will be allowed a premium of 20pc to India's administered price mechanism (APM), Thakur said, adding that a separate detailed notification on this will be issued later. The APM fixes prices of gas sold by state-owned producers and sets a pricing floor for the industry.

"With the provision of a floor in gas prices as well as provision for [a] 20pc premium for new wells, this reform will incentivise ONGC and Oil India to make additional long-term investments in the upstream sector, leading to greater production of natural gas and [a] consequent reduction in import dependence of fossil fuels," the oil ministry said.

Incentivising production, consumption

These reforms are also intended to ensure a stable pricing regime for domestic gas consumers and provide adequate protection to producers from adverse market fluctuations and incentivise more production, the oil ministry added.

Delhi has outlined plans to make the country a gas-based economy, with the share of natural gas in its primary energy mix targeted to rise to 15pc by 2030 from around 6pc in 2022. It also aims to expand domestic gas consumption as it tries to move away from more polluting fuels like coal in its efforts to cut carbon emissions by 1bn t by 2030 from 2005 levels, progressing towards net zero emissions by 2070.

India's LNG consumption rose by 7pc on the year to 4.84bn m³ in February, while imports moved up by 11pc on the year to 2.25bn m³, oil ministry data showed. Domestic production of natural gas increased to 2.6bn m³ in February, up by 13pc on the year, with supplies from offshore fields at 1.8bn m³, followed by onshore fields at 806mn m³.

India's natural gas production has been rebounding steadily following an easing of the Covid-19 pandemic. Gas output from India's offshore fields such as the Mumbai High and KG basin in east India rose by 4.5pc from a year earlier to 17.49mn t (23.2bn m³) last year, while gas production from onshore fields remained largely unchanged at 7.8mn t, according to oil ministry data. India's natural gas output was 25.18mn t in 2022, up by 3pc from 2021.

By Rituparna Ghosh

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