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Background of Kirit Parikh Committee on Gas Pricing
Current Gas Pricing Mechanism: India’s gas price is determined at an average price of LNG imports into India and benchmark global gas rates.
- Under the current mechanism, price of domestically produced natural gas is revised in line with the average prices in four key global markets — US Henry Hub, Canada Alberta gas, UK NBP, and Russian Natural Gas — every six months.
- From 1 October, the price of gas produced from old fields, which contribute nearly two-thirds of India’s natural gas production, was increased to $8.57 per million British thermal unit (mmBtu) from $6.1/mmBtu.
Total Gas Consumption in India: It is 175 million standard cubic metre a day (MMSCMD), of this 93 MMCMD is met through domestic production and 82 MMSCMD through LNG imports. Gas Consumption is directly linked to supply availability.
- India aspires to become a gas-based economy with the share of natural gas in its primary energy mix targeted to rise to 15 per cent by 2030 from the existing level of around 6.3 per cent.
Need of Revision: Local gas prices are at a record high due to the surge in global prices because of the ongoing Russia-Ukraine conflict and are expected to rise further.
- Pushed Inflation: High gas price has pushed inflation above the Reserve Bank of India’s tolerance band of 2%-6% for seven consecutive months.
Mandate of Panel: To ensure fair price to the end-consumer through market-oriented, transparent and reliable pricing regime for India’s long-term vision for ensuring a gas-based economy.
- To suggest a regime that would help raise domestic production to help meet the goal of 15% of energy coming from Gas by 2030.
Pricing Of Gas From Two Sources
Administered Price Mechanism (APM) gas: It is the legacy or old fields which were given to ONGC and OIL on a nomination basis without any condition of sharing profits and therefore the government controls its price.
- This gas totalled 49.26 million standard cubic metres per day in 2021-22.
- It accounts for over 90 per cent of ONGC natural gas output.
- A third of this gas was used for generating electricity, 22 per cent for converting into CNG to run automobiles and piping natural gas (PNG) to household kitchens for cooking purposes and 17 per cent for producing fertilizer.
The second set is for the ones that are in difficult geology.
Kirit Parikh Committee on Gas Pricing Recommendation
- A floor and ceiling price for legacy fields and complete pricing freedom starting January 1, 2026.
- It would ensure a predictable pricing regime for producers and at the same time moderate prices of CNG and piped cooking gas which has shot up by 70% since last year on the back of a surge in input cost.
Prices of domestic gas should be linked to the international It has suggested removal of price cap in the next 3 years.
- State producers Oil and Natural Gas Corporation (ONGC) and Oil India Ltd. (OIL) will be paid a price linked to imported oil but it will have a minimum or floor price of $4 per million British thermal unit and a cap or ceiling price of $6.5.
- This compares to the current rate of $8.57 derived from a formula linked to the price prevailing in gas-surplus nations.
- The ceiling rate for this gas from legacy or old fields, called APM gas, will be increased by $0.5 per mm btu annually.
For Difficult Geology: Panel was in favour of not tinkering with the existing pricing formula for fields in difficult geology such as KG-D6 of Reliance Industries and BP PLC.
- Currently, fields in deep-sea or in high-temperature, high-pressure zones are governed by a different formula that includes an element of imported LNG cost, but the same is also subject to a ceiling.
- The ceiling for these fields currently is $12.46.
Under GST: Include natural gas in the one-nation-one-tax regime of GST by subsuming excise duty charged by the central government and varying rates of VAT levied by state governments.
- State Concern: To address it, panel was in favour of setting up a mechanism similar to the compensation cess regime that 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.
- Panel was in favour of moderation in rates of excise duty.
Significance of Kirit Parikh Committee
Improve Gas Market: Floor and ceiling prices provide healthy gas realization to upstream producers with graded increases over the next 5 years moving to full decontrol from January 1, 2027.
Stakeholders: It would act as a great balancing act to safeguard the interest of gas consumers, city gas distribution companies and gas producers from difficult fields.
- However, producers of domestic gas from legacy fields under APM pricing mechanism may stand to lose around Rs 23,000 cr in FY24.
Consumer’s Perspective: Reduction in gas price should result in a cut in CNG and PNG (domestic) prices by the CGD players and would improve the conversion economics for the end consumers thereby stimulating demand.
- It shall boost the use of natural gas and shall help the Government to contain high inflation.
Free pricing of domestic gas from difficult fields would attract sizeable investment from upstream companies which could lead to higher domestic gas production in the long run.