India approves revised gas pricing regime to protect consumers from volatility

India's cabinet has approved revised natural gas pricing guidelines for domestically produced natural gas in line with the recommendations of the Kirit Parikh panel report, Information and Broadcasting Minister Anurag Thakur said late April 6.

Under the revised guidelines, the price of natural gas under the country's Administered Pricing Mechanism will be 10% of the monthly average of the Indian Crude Basket and it will be announced through a notification every month instead of being revised every six months.

The Cabinet Committee on Economic Affairs also approved a floor price of $4/MMBtu for Administered Pricing Mechanism gas and a ceiling price of $6.50/MMBtu, compared to prevailing natural gas prices of around $8.57/MMBtu when the initial recommendations were made.

The Administered Pricing Mechanism covers around 70% of India's domestic gas production, mainly from the fields of national oil companies like Oil & Natural Gas Corp. and Oil India Ltd.

The pricing regime also covers upstream assets that were awarded under India's New Exploration Licensing Policy (NELP) as well as pre-NELP blocks, where the Production Sharing Contract, or PSC, provides for government's approval of prices.

The floor price and the ceiling price will be applicable for two years, an oil ministry official said.

Gas produced from new wells or well interventions in the nomination fields of state-run explorers ONGC and OIL would be allowed a premium of 20% over the APM price, the government said in a statement.

It said the new guidelines were intended to ensure a stable pricing regime for domestic gas consumers while at the same time providing adequate protection to producers from adverse market fluctuation with incentives for enhancing production.

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

It said with the provision of a floor for gas prices as well as provision for a 20% premium for new wells, this reform will incentivize ONGC and OIL to make additional long-term investments in the upstream sector leading to greater production of natural gas and lesser import dependence.

Currently, India's gas prices are determined under domestic gas pricing guidelines issued in 2014 under which prices were set every six months based on the volume weighted prices prevailing at four gas trading hubs -- Henry Hub, the Alberta gas price, National Balancing Point (UK), and Russian gas prices over a period of 12 months and with a time lag of a quarter.

"As the earlier guidelines based on four gas hubs had a significant time lag and very high volatility, the need for this rationalization and reform was felt," the government said.

It said the revised guidelines link prices to crude oil, which is a practice now followed in most industry contracts and more relevant to the country's consumption basket, and has deeper liquidity in global trading markets on a real-time basis.

"With the changes now approved, data of the Indian Crude Basket price from the previous month would form the basis for APM gas price determination," the government said.

A day after India approved the new gas pricing regime, the domestic gas price was estimated at $7.92/MMBtu for the April 8-30 period compared with $9.16/MMBtu for April 1-7, on the basis of prices linked to India's crude oil import basket.

However, gas produced by state-run explorers ONGC and OIL from old fields will be capped at $6.5/MMBtu under the new price regime for natural gas that comes into effect from April 8, according to a notification from the Petroleum Planning and Analysis Cell, the statistics arm of the oil ministry, dated April 7.

The Platts JKM for May delivery was assessed at $12.194/MMBtu April 6, and the West India market, which represents LNG prices delivered into India on a spot basis, fell below $12/MMBtu on the same day, according to data from S&P Global Commodity Insights.