Pricing plan for natural gas gets cabinet okay3 min read . Updated: 08 Oct 2020, 07:01 AM IST
- The move is aimed at wooing investors in the exploration and production of natural gas and encouraging its use
NEW DELHI: The Cabinet Committee on Economic Affairs (CCEA) on Wednesday approved the formulation of a standard procedure for market price discovery of gas across various contractual regimes, said petroleum and natural gas minister Dharmendra Pradhan.
Briefing reporters after the Cabinet meeting, Pradhan added that a standardized e-bidding mechanism will be proposed by the directorate general of hydrocarbons (DGH) for the transparent discovery of gas market price.
The move is expected to attract investors and help India’s push for a gas-based economy. Pradhan said the decision will help increase domestic gas production by an additional 40 million standard cubic meters a day (mmscmd), from the current 80 mmscmd.
The government has already provided for pricing and marketing freedom of gas from blocks awarded under the Discovered Small Field Policy (DSF), Hydrocarbon Exploration and Licensing Policy (HELP) and Coal Bed Methane (CBM) contracts, and discoveries from difficult fields such as deep water, ultra-deep water and high pressure-high temperature areas.
Wednesday’s decision will bring all of it under a standard procedure for market price discovery of gas.
“The objective of the policy is to prescribe standard procedure to discover market price of gas to be sold in the market by gas producers, through a transparent and competitive process, permit Affiliates to participate in bidding process for sale of gas and allow marketing freedom to certain Field Development Plans (FDPs) where Production Sharing Contracts already provide pricing freedom," the government said in a statement.
However, this mechanism will not be applicable for production from blocks awarded on a nomination basis, governed by a formula announced in October 2014 by the National Democratic Alliance government. The formula uses the weighted averages of prices in the three major international gas trading hubs of US Henry Hub, the UK National Balancing Point and Japan’s custom-cleared rate.
Experts have welcomed the move.
“This is a fantastic development and brings us very near to the open market mechanism. The move will benefit the producers who may get constrained owing to prevalent ceiling prices. The move will promote investment in E&P and potentially balance the margins from downstream to upstream players. Going forward, maybe even a centralised platform may not be required and we could move to open mechanism, where gas to gas competition becomes prevalent given significant LNG import terminals being commissioned," said Sanjay Sah, partner oil and gas at Deloitte.
“This will bring uniformity in the bidding process across the various contractual regimes and policies to avoid ambiguity and contribute towards ease of doing business," the government statement said and added, “The domestic gas production has complete marketing and pricing freedom. All discoveries and field development plans approved after 28 Feb, 2019 have complete market and pricing freedom."
Gas comprises about 6.2% of India’s primary energy mix, far behind the global average of 24%. The government plans to increase this share to 15% by 2030. India’s gas demand is expected to be driven by fertiliser, power, city gas distribution, and steel sectors.
“In a significant step to move towards gas based economy, Cabinet approves ‘Natural Gas Marketing Reforms’; move aims to prescribe standard procedure to discover market price of gas to be sold in the market through a transparent and competitive process," the government spokesperson said in a tweet.
“This will bring uniformity in the bidding process across the various contractual regimes and policies to avoid ambiguity and contribute towards ease of doing business," the government spokesperson said in another tweet.
This comes at a time when the share of imported LNG has risen. According to analysts, domestic gas consumption had hit a high in 2010, when Reliance Industries Ltd's D6 block in the Krishna-Godavari basin produced 61.43 mmscmd in March 2010. Production started declining from April 2010 and is almost negligible today.
As per the gas price formula for nominated fields, India has reduced the domestic natural gas price to $1.79 per million British thermal units (mmBtu)—the lowest under the new domestic gas price regime, which was introduced in 2014. The new price will be applicable from 1 October till 31 March. The reduction has been aided by a steep fall in the prices of crude oil and gas.
This sharpest price decline till date will help reduce the cost of urea manufacturing, power generation and benefit compressed natural gas (CNG) and piped natural gas (PNG) consumers in the backdrop of global energy prices in a tailspin amid nationwide lockdowns to stop the coronavirus (Covid-19) pandemic.