The Kirit Parikh Committee, which was set up by the government to review the gas pricing formula, has submitted its recommendations to the Ministry of Petroleum and Natural Gas.

 

About ‘gas pricing in India’

  • Much of the natural gas being produced in the country does not command a market-determined price — that is, it is not determined by buyers and sellers based on demand-supply dynamics in the market.
  • Rather, a formula is used to fix the price of the fuel every six months.
  • As per this formula, the domestic gas price is the weighted average price of four global benchmarks
    • US-based Henry Hub,
    • Canada-based Alberta gas,
    • UK-based NBP, and
    • Russian gas.
  • The domestic price is based on the prices of these international benchmarks in the prior year, and kicks in with a quarter’s lag. It applies for six months.
  • So, the price applicable from April 1st to September 30, 2022 is based on benchmark prices from January to December 2021.

 

Evaluation of this formula

  • This formula-based pricing has some interesting features and outcomes.
  • One, the formula has no mention about gas actually imported into India. Typically, gas imported in Asian markets is costlier than many international benchmarks.
    • In effect, the price of domestic gas is lower than that of gas imports.
  • Second, the averaging of benchmark prices over the past year and then the time lag of a quarter mean that the domestic gas price movement is often out of sync with whats really happening on the ground.

 

Criticism of this formula

  • Domestic gas prices have been rising in the past couple of years but thanks to the formula, they are still cheaper than imported gas.
  • Now, this acts as disincentive to local producers such as ONGC, Oil India and Reliance Industries who often find that the price is not worth their time and effort to increase output.
  • This eventually leads to increased gas imports at higher prices.

 

Recommendations

  • The committee has recommended a price band of $4-6.50/unit for gas from old legacy fields, which account for over 70 per cent of the domestic output.
    • A price band will ensure a predictable pricing regime for producers and protect consumers by moderating CNG and PNG price spikes.
      • State run ONGC and OIL largely operate legacy fields in the country.
  • The panel had suggested linking the price of gas produced by state-owned firms from fields given to them on a nomination basis to imported crude oil prices rather than benchmarking them to gas rates in international market
  • The committee has proposed abolishing formula-based gas pricing and implementing fully market-determined rates by January 2027.
  • It also suggested including natural gas in the one-nation-one-tax regime of GST.
    • It can be done by subsuming excise duty charged by the central government and varying rates of VAT levied by state governments.
  • To address state concern of loss of revenue, the panel was in favour of setting up a mechanism similar to the compensation cess regime.
    • This regime made good for any revenue loss that states incurred by way of giving their right to levy VAT and other taxes on goods and services in first five years of implementation of GST regime from July 1, 2017.
  • Also, the panel was in favour of moderation in rates of excise duty.