Date: 26/12/2022

Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Key Phrases: Fair price system for gas, Kirit Parikh, Petroleum and Natural Gas Regulatory Board, Administrator price mechanism, Petroleum Planning and Analysis Cell.

Why in News?

• The pricing of gas is a critical issue faced by all the stakeholders — producers, policymakers and consumers.
• Thus, an expert committee under the chairmanship of Kirit Parikh had been constituted in August this year to put in place a fair price system for gas.

Key Highlights:

• Gas demand is directly linked to availability of the fuel.
• The total volume consumed in the country is 170 million standard cubic metre per day, and almost 50 per cent of this is imported.

Gas Pricing Mechanism in India:

• Presently there are broadly two pricing regimes for gas in India i.e., gas priced under administrator price mechanism(APM) and non APM or free market gas.
  1. Administrator price mechanism(APM):
     • It is an example of the ‘assessed’ price where the price of APM gas is set by the government.
     • APM gas comes from the existing fields of oil and natural gas corporations and oil India limited.
     • It is allocated only to a select category of consumers belonging primarily to the power, fertilizers and city gas distribution business.
     • Petroleum Planning and Analysis Cell (PPAC) attached to the Ministry of Petroleum and Natural Gas declares the APM gas price.
     • The ‘assessed’ APM price set by the government is deliberately kept low for the poor who benefit from the subsidized rates. Such assessments have been based on a complex ‘cost-plus’ method that adds the cost of raw material, production, distribution, and marketing.
     • Issues with the mechanism:
       • There’s no way of verifying appropriateness or accuracy, because the price-setting processes are opaque.
       • It creates an opportunity for state or private owner intervention at every level, as also for corruption, since the assessments are subjective.
  2. Non-APM/free market gas:
     • It is broadly subdivided into two categories:
       • imported LNG
       • domestically produced gas from JV fields
     • While the price of LNG imported under term contracts is governed by the Special Purchase Agreement(SPA) between the LNG seller and the buyer, the spot cargoes are purchased on mutually agreeable commercial terms.
     • As regards JV gas, its pricing is governed in terms of the Production Sharing Contract(PSC) provisions.
     • It links India’s natural gas prices to the international market, more specifically to the benchmarks of the U.S., UK, Japan, and those of countries such as Qatar and Australia.
     • Issues with the mechanism:
       • Although this is a transparent process, the market-linked international price comes with its own limitations for India.
       • Since the gas rates partially depend on crude prices, they become directly affected by the volatility of the global crude oil markets and if the prices are denominated in dollars, a weakening rupee will cause a loss for the Indian consumer.
       • These limitations with the international market-linked prices, coupled with the country’s own inefficient domestic assessments now under scrutiny for corruption, make price assessment in India sub-optimal at best.

Mandate of the Kirit Parikh Committee:

• Critically examine and review the current domestic natural gas pricing regime, including pricing freedom for the gas to be produced from discoveries in deep water, ultra deep water and high-pressure high-temperature areas
• Examining the issues related to ensuring fair prices to the end-consumer
• To suggest market-oriented, transparent and reliable pricing

Recommendations of the committee:

• A change in the formula for pricing of gas produced from nomination fields (APM gas) to make it more market oriented.
• Removal of ceiling price for gas from high pressure-high temperature areas from a specified date.
• The APM price should be maintained between a floor and ceiling for domestic consumers.
• A period after which the pricing will be market determined.
• According to the committee, the price of APM and other gas whose prices are set by government should be fully deregulated ideally by January 1, 2027, if the gas price volatility on the international market has moderated.

Issues with the recommendations:

1. Continued subsidy for city gas entities is untargeted and unsustainable:

   • The Parikh committee recommendations are tilted in favour of continued subsidy for city gas entities, which is untargeted and unsustainable.
   • Indiscriminate grant of city gas distribution licences over the last few years assuming assured supply of subsidised gas is a questionable and unviable strategy.

2. Issue of suppression of upper band of gas price not addressed:
   • The upper band of the gas price should not be artificially suppressed, and should reflect the ‘opportunity cost’ of gas for the Indian economy.
   • A suppressed APM price will distort the market as per most of the stakeholders in the industry and the committee has not addressed this issue.
3. Suggestions favouring city gas distribution entities:
   • While the government’s intent is to make the price more consumer-friendly, the suggestions by the committee are titled more towards city gas distribution entities as they have been given freedom to decide on the price.
   • Moreover, there is no entity currently to regulate this price.
4. Continuation of APM regime:
   • APM gas is currently sold through an allocation policy, whose continuation is recommended by the committee with the highest priority being given to CNG (transport) and PNG (domestic) sectors.
   • However, the government may consider a staggered plan for exiting from APM gas allocation, on the lines of its exit from crude oil allocation, which was done from October 1, 2022, onwards.

Way Forward:

• The government should think of empowering an authority like the Petroleum and Natural Gas Regulatory Board (PNGRB), on the lines of the State Electricity Authority, to regulate gas prices.
• For the market to mature and grow, it is important to have a smooth transition to marketing and pricing freedom for all sources of gas.

Source: Hindu BL

Mains Question:

Q. Explain the gas pricing mechanism in India. Suggest measures which will lead to a smooth transition to marketing and pricing freedom for all sources of gas. (150 words)