The newly appointed Petroleum Secretary S.Sundareshan, has stated that the government was weighing policy options to end differential pricing of natural gas in the country. Sundareshan mentioned that the Government was studying the option for uniform pricing of gas from various sources to consumers. The statement has reignited the debate of right gas pricing strategy. Questions are also being raised whether the current gas prices are overpriced for several gas consuming industries and underpriced for others.
Differential gas pricing existing in the market:
At present, differential gas prices exist in the Indian market— one price for gas produced from APM gas fields and various other market-linked prices from different sources. From APM blocks, about 55 million standard cubic metre (mmscmd) of gas is supplied to priority sectors like fertilizer and power price for which is set at discounted rate of $1.97 per mmbtu. Whereas, market-linked prices varies from $3.7 per mmbtu to $5.7 per mmbtu from different sources. Long-term LNG sourced by Petronet is sold at over $6 per mmbtu and spot LNG is sold at above $8 per mmbtu.
Differential pricing not new to the Indian market:
Differential gas price is something not very new to Indian gas market. During evolutionary phase of gas in India that dates back to 1970s, ONGC used to set the gas prices based on negotiations with diverse customers, leading to different gas prices for different customers as per their affordability. During mid 70s, the gas prices started being determined by the producers based on thermal equivalence of the substitute fuel and opportunity cost to consumer.
Uniform pricing led to Government control over the sector in the past:
Moreover, it is not the first time when the Government has conceived the proposal of a uniform gas price for the Indian market. It was in 1986, the Government started intervening in the fixation of gas prices and decided to have a uniform gas prices. In 1992, the Government fixed the gas prices based on Kelkar committee recommendations at Rs 1,550 per thousand cubic metres (Mscm), which increased by Rs 100 annually during next four years till 1995. In 1998-99, a committee headed by T L Shankar suggested for linkage of consumer prices of gas to international basket of fuel. As per the recommendations, the price linkage was set at 65%, which was to increase 10% during the subsequent years till the complete deregulation.
However, the consumer prices of gas could never attained complete deregulation following constant Government intervention and retained at Rs 2,850/Mscm since 1999 till June, 2005. In July, 2005, the gas price was increased to 3,200/Mscm ($1.97 per mmbtu) restricting quantum of APM gas to 55 mmscmd.
Rationalization of APM gas price a welcome idea, but the uniform gas pricing strategy debatable:
Rationalization of APM gas price will provide a level playing field to all the companies investing heavily in the Indian sedimentary basins. The strategy will duly incentives state-run gas producer ONGC for its enormous efforts. Currently, the company is loosing about Rs 4,745 crore annually by selling the gas at a discounted price than its production cost. During 2008-09, the cost of gas production for the company was Rs 5,870/Mscm against the selling price of Rs 3,200/ Mscm. A competitive price for APM gas will brush off the losses of the company, incurred on account of subsidized gas price. At the same time, it will produce some profit for ONGC to remain competitive in the market.
Rationalization of APM gas price will provide a level playing field to all the companies investing heavily in the Indian sedimentary basins. The strategy will duly incentives state-run gas producer ONGC for its enormous efforts. Currently, the company is loosing about Rs 4,745 crore annually by selling the gas at a discounted price than its production cost. During 2008-09, the cost of gas production for the company was Rs 5,870/Mscm against the selling price of Rs 3,200/ Mscm. A competitive price for APM gas will brush off the losses of the company, incurred on account of subsidized gas price. At the same time, it will produce some profit for ONGC to remain competitive in the market.
Importantly, market oriented price for APM gas will also help to encourage the companies to maintain production from depleting APM gas fields. Most of the fields under APM are old-aged basins and, production from these fields have already reached its peak and now heading downward. It requires plenty of efforts for the companies to retain the production level. A discounted price does not provide any enticement to the companies to sustain the production. If the output from the field is priced correctly and the company senses some benefit from it, the companies will take all the necessary steps to sustain the production.
Though, the idea to bring the APM gas price to market level is a welcome move, but, the strategy of uniform gas prices from various sources is debatable. Uniform pricing may benefit the consumers but it may put an end to the idea of competition and efficiency. Probably, Government is trying to negate the locational advantage. Even in matured markets Gas pricing is linked with market forces. In an evolving gas market like India, gas price needs to be driven by market forces.
A better pricing strategy would be to sell gas as per the affordability of the consumer industry. It implies that an industry which can afford higher gas price should pay more compared to the industry which can afford to lower gas price. Major gas consuming industries in the country are fertilizer, power, steel, city gas and other industrial sectors. Affordability of each of these industries varies with respect to cost of alternative fuels/feedstocks.
Though, the idea to bring the APM gas price to market level is a welcome move, but, the strategy of uniform gas prices from various sources is debatable. Uniform pricing may benefit the consumers but it may put an end to the idea of competition and efficiency. Probably, Government is trying to negate the locational advantage. Even in matured markets Gas pricing is linked with market forces. In an evolving gas market like India, gas price needs to be driven by market forces.
A better pricing strategy would be to sell gas as per the affordability of the consumer industry. It implies that an industry which can afford higher gas price should pay more compared to the industry which can afford to lower gas price. Major gas consuming industries in the country are fertilizer, power, steel, city gas and other industrial sectors. Affordability of each of these industries varies with respect to cost of alternative fuels/feedstocks.
Affordable Gas Price for Power Sector:
Power plants supplying electricity on long-term basis can afford $5-6 per mmbtu gas price:
Majority of the power generation tariff across the country is around Rs 2.5 per unit for long-term fixed contracts. Considering this tariff as the benchmark, the backward calculation, according to a research done by consulting firm ICF, indicates that gas price of $5 - $6 per mmbtu is affordable price range for the power sector. At this gas price range power tariff of Rs 2.5 per unit is easily achievable.
Merchant power plants can soak gas price of $8-9 per mmbtu:
Merchant plants in the country sell their power at an average price of about Rs 4.5 per unit which can go as high as Rs 10 per unit during high demand seasons. Considering the average price of Rs 4.5 per unit as the benchmark, affordability of merchant power plants, according to a TERI study, can vary in the range of $8 – $9 per mmbtu.
Merchant plants in the country sell their power at an average price of about Rs 4.5 per unit which can go as high as Rs 10 per unit during high demand seasons. Considering the average price of Rs 4.5 per unit as the benchmark, affordability of merchant power plants, according to a TERI study, can vary in the range of $8 – $9 per mmbtu.
Captive power plants can easily absorb higher gas price of $15-20 per mmbtu:
Electricity generation cost for captive power plants generally varies between Rs 8 – Rs 12 per unit on account of use of costlier fuels like naphtha and diesel. The cost of generation for these captive units varies in the range as mentioned above despite the fact that these plants use the diesel as fuel, price of which is subsidized by the Government. Therefore, with such high cost of power generation, the captive power plants can easily absorb gas prices of $15 - $20 per mmbtu. The affordability price range can be even higher depending upon the price of crude oil in the market, as the price of crude by-products naphtha and diesel depends upon the crude price and results in higher or lower prices of power generation for captive units.
Conclusion:
Gas pricing in India has been contentious issue over the years. The Government, in the meanwhile, has allowed the gas prices from new sources to be determined by the market forces. However, it has continued regulating the price of gas from old basins. Many-years long wait of ONGC, producer of APM gas, appears to come to end as the new petroleum secretary in-charge is gearing up for rationalization of APM gas prices. However, the strategy to bring uniformity in gas prices being produced from various sources does not seems to be the best approach. In India, affordability for gas prices varies with various gas consuming industries. Gas price affordability for fertilizer and base load power producers is low, whereas, it is much higher for merchant and captive power producers, transportation and cooking gas sector and industrial sector.
Hence, the gas prices in the country need to be priced according to the affordability of various gas consuming industries. This will allow the Government to charge higher prices from captive power producers, transportation and industrial sectors, which can compensate for the hefty subsidy being dolled out by the Government.
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