Gas pricing in India

There are multiple pricing regimes existing in the country for Natural gas supplies. This could be broadly divided into three categories:

•APM Gas

•Non APM Gas

•LNG

Further, there is differential pricing existing for different sectors. Subsidized sectors such as power and fertilizer get relatively less prices as compared to other sectors. Also, region specific pricing exists in the country with North Eastern states getting gas at relatively cheaper prices as compared to other parts of the country. Pricing of major share of gas supplies in the Indian market is controlled and is not market driven as government approval is required before changing the price. Controlled pricing may result in disincentivizing investments in the sector in terms of limited participation from foreign players, who have access to technology, much required in deep-water E&P activities.

Also, controlled pricing hampers the competitiveness of consuming sectors (power/ fertilizer/ domestic) to compete with global energy markets as it leads to low investments in energy efficiency on the demand side. Policy makers have been considering various aspects to look at the pricing of natural gas. Some of the deliberations done by the government of India on pricing include:

•Pooled Pricing of Gas: As multiple pricing regimes exist in the country, pooling of gas from different sources has been deliberated by the policy makers. A sectoral pool was being considered with separate pools of power and fertilizer customers. Separate pools were considered in view of avoiding cross subsidies between the customer groups and related administrative issues arising.

•Rangarajan Committee recommendations on Pricing: The committee has suggested a uniform gas-pricing, at ‘unbiased arms-length’. The formula of domestic gas pricing should be 12-month trailing average of volume-weighted average at well-head (on net-back basis) for gas imports and volume-weighted average of US Henry Hub, UK NBP and Japanese Crude Cocktail prices. Gas prices are expected to increase based on the suggested framework by Rangarajan committee.

The Deloitte view

Debasish Mishra, Senior Director, Deloitte in India says, “A $1 hike in gas prices would necessitate a R0.36/ unit increase in electricity tariff. The Rangarajan committee’s recommended price of $8 /mmBtu is a good base price as it is feasible for power companies to use gas at up to $10/mmbtu. The bigger challenge in India is availability of domestic gas. On a long term, to promote more investments in exploration, Government should come out with a market based pricing mechanism and a transparent allocation policy.”

For a detailed perspective on pricing and regulation in the energy space in India, please access the Deloitte thoughware – IEC 2013, Securing tomorrow’s energy today: Policy & regulations