Context

The Petroleum and Natural Gas Regulatory Board (PNGRB) has published a discussion paper on moving from a system where buyers of gas are charged for every pipeline they use in the system to a single charge across a pipeline network.

Objective

• The proposal is part of a larger effort by the government to boost the share of natural gas in India’s energy basket from around 6 percent currently to 25 percent by 2030.

What is the proposed move?

• The government is aiming to cut down the cost of transportation of natural gas by setting a fixed tariff for longer distances to boost consumption.
• The government is proposing a unified price system with one price for those transporting gas nearby within 300 km and one price for those transporting gas beyond 300km.
• The move would fix tariff prices within an integrated pipeline network such as that of GAIL, which has India’s largest gas transportation pipeline network in the country preventing buyers from having to pay charges for the use of multiple pipelines.
• Such a move would help connect new markets and would benefit consumers in parts of the country far from the western coast

Current Gas Pricing in India and issues associated with it

• Multiple pricing regimes are existing in the country for Natural gas supplies. This could be broadly divided into three categories:
  • Administrative Price Mechanism (APM) Gas
  • Non-APM Gas
  • LNG
• Further, there is differential pricing existing for different sectors.
  • Subsidized sectors such as power and fertilizer get relatively fewer 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.
• Currently, tariffs for transportation of gas are set by the Petroleum and Natural Gas Regulatory Board (PNGRB) separately for each pipeline based on the assumptions of the volume of gas transported on the pipeline and its operating life aimed at providing the operator a pre-tax return of 18%.
• Tariffs for pipeline usage are divided into zones of 300km, with the tariff increasing for zones further away from the point where gas is injected.
• Further, if a buyer needs multiple pipelines even from the same operator, that transport tariff would increase. These tariffs increase the cost for buyers of gas further away from the point of injection of natural gas.
• All of India’s imported natural gas arrives at terminals on the west coast leading to costs for buyers increasing, the further east they are located.
  • For example- A consumer in Bihar or West Bengal has to use 2-3 pipelines of GAIL to get natural gas from Hazira and the tariff becomes additive.
• Transport cost accounts or as much as 10% of the final cost of gas to an industry currently because of low international prices but usually accounts for around 2-3% of the price of natural gas.
  • This cost would increase significantly for buyers of gas in far-flung areas of the country because of the current gas transport tariffs.
• There is no trading hub yet in India, although its creation has been suggested for 2019. The creation of a gas hub would allow transparent price discovery based on buyers and sellers interacting in an open market and has the potential to remove the multiple price regimes in India.
• The price of domestic gas is lower than that of (imported) LNG and is defined by indexation to international markets. Since India sources around 50% of its LNG imports via long-term contracts and the other half from spot markets, the price difference between oil-linked and spot gas is very important for Indian buyers. As spot gas has become noticeably cheaper, buyers of oil-indexed gas are likely to seek contractual renegotiations.
• Since natural gas does not fall under the GST, gas consumption is taxed at several state and central government levels, in addition to the gas transport tariffs.
  • Bringing natural gas under the GST and introducing a postage stamp gas transport tariff would reduce these costs and create a level playing field with other fuels.

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 policymakers.
  • A sectoral pool was being considered with separate pools of power and fertilizer customers.
  • Separate pools were considered because 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 a 12-month trailing average of volume-weighted average at well-head (on the net-back basis) for gas imports and the 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 the Rangarajan committee.

Conclusion

As the share of natural gas is on the rise, it is advisable to embark on developing a gas security policy based on a well-functioning domestic gas market and robust gas infrastructure. The GoI should, therefore, promote the development of a functioning gas market that can allow supply to meet demand. This includes market-based price discovery, robust gas infrastructure, an independent regulator, third-party access to infrastructure, and competition among multiple buyers and sellers.