PNG, CNG prices set to reduce as Cabinet announces new pricing mechanism

The Cabinet on Thursday announced a new pricing mechanism for the bulk of domestically-produced natural gas by state-run explorers :

10% of India’s monthly average import price of crude oil with a floor of $4 per unit and a cap of $6.5. The move will effectively reduce costs of piped natural gas (PNG) supplied to kitchens and compressed natural gas (CNG) for automobiles by up to 11% from Saturday.

Announcing the decision on Thursday evening, Union information and broadcasting minister Anurag Thakur said the decision coincides the Bharatiya Janata Party’s (BJP) foundation day and aims at providing relief to millions of consumers, particularly those using PNG and CNG across the country. “Hon’ble Prime Minister Narendra Modi has given the gift to the people on the foundation day… It is a good day and a good decision as this [decision] would benefit all – domestic [consumers], industrial [units] and farmers,” he said.

The minister said “the tentative impact of price reduction in APM (administered price mechanism) gas” would help PNG and CNG consumers. If CNG is priced at ₹92 per kg in Pune, it will be reduced to ₹87 a kg, he said. Similarly, PNG will cost ₹52 instead of ₹57. In Mumbai, if it is ₹54, it will become ₹52. In Delhi, it will be reduced from ₹53.49 to ₹47.49. In Bengaluru, it will drop from 58.5 to ₹52, he added. APM or the administered price mechanism is applicable to those blocks that have been given to state-run explorers — Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) – on nomination basis, without competitive bidding.

The Cabinet’s decision is based on the recommendations of an expert panel chaired by economist Kirit Parikh, which submitted its report on November 30, 2022, proposing a floor of $4 per unit and cap of $6.5 for natural gas produced from old APM fields operated by ONGC and OIL. As the committee’s mandate was limited to the review of the 2014-formula for APM gas , it did not tweak gas prices of difficult deep water fields such as Reliance-BP’s KG-D6, which is based on a different formula approved in 2016.

Thakur said the new formula “strikes a balance between interests of both consumers and producers”. India is heavily dependent on import of energy. It imports over 85% of crude oil it processes and 55% of natural gas. It is in the interest of the country to also incentivise oil and gas producers to ramp up output from the domestic fields and make new discoveries, a government official said requesting anonymity.

According to an oil ministry statement, the new pricing formula is also applicable to so-called New Exploration Licensing Policy (NELP) blocks and pre-NELP blocks, where production sharing contracts (PSCs) between the government and energy exporters allow for the government’s approval of prices. However, the floor and ceiling is applicable to only to gas produced by ONGC and OIL from nominated blocks.

According to the new formula, the price of natural gas produced from the three catagories of fields mentioned above shall be 10% of the monthly average of Indian crude basket [average cost of crude import] and shall be notified on a monthly basis. “For the gas produced by ONGC & OIL from their nomination blocks, the Administered Price Mechanism (APM) price shall be subject to a floor and a ceiling,” the statement added.

According to petroleum secretary Pankaj Jain, gas produced from new wells or well interventions in the nomination fields of ONGC and OIL, would be allowed a premium of 20% over the APM price as incentive for ramping up output through fresh investments and bringing in latest technology. He said a detailed notification on this would be issued separately.

The new pricing regime would also help India’s gas-based economy, the minister said. The government has targeted to increase the share of natural gas in primary energy mix in India from current 6.5% to 15% by 2030.

“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. With the provision of a floor in gas prices as well as provision for 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 consequent reduction in import dependence of fossil fuels,” the oil ministry said in the statement.

Currently, domestic gas prices are determined as per the new Domestic Gas Pricing Guidelines, 2014 which were approved by Government in 2014. The 2014 pricing guidelines provided for declaration of domestic gas prices for a six month period based on the volume weighted prices prevailing at four gas trading hubs – Henry Hub, Albena, National Balancing Point (UK), and Russia for 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 revised guidelines make prices linked to crude, which is a practice now followed in most industry contracts, is more relevant to our consumption basket and has deeper liquidity in global trading markets, on a real time basis. With the changes now approved, data of Indian Crude basket price from the previous month would form the basis for APM gas price determination,” the oil ministry said in the statement. .