Mint Explainer: Why a gas price cap is only half the battle for India

1. The ceiling after the surge

In 2014, the government linked local gas prices to global benchmarks such as Henry Hub, Alberta gas, NBP and Russian gas to encourage domestic production. As the Ukraine war disrupted supplies and drove up global prices, the government in October raised the price of gas from older gas fields to $8.57 mmBtu, a three-fold spike over a year, fetching windfall gains for gas producers. Those days seem to be over — the Kirit Parikh panel has suggested a floor price of $4mmBtu to recover the cost of production of Oil India and the Oil and Natural Gas Corp. (ONGC), and a ceiling of $6.5 mmbtu, which can be raised every year by 0.5 mmbtu till 2027. It recommended a 1 January, 2027 date for dismantling the administered price regime of natural gas.

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Essentially, the price ceiling of $6.5 means a reduction from the current $8.57, with incremental hikes over the next few years. Free pricing must wait until the crisis has blown over and prices have settled, though the committee wants India to commit to market reforms over the medium to long term. This is similar to the approach taken for petrol and diesel price deregulation in 2010 and 2014, when prices were freed when crude prices were relatively low. Also, diesel prices were initially raised by 50 paise every month in 2013 before full deregulation in 2014. This incremental approach is being suggested for gas price deregulation as well.

2. The supply snags

The recommendations come in the backdrop of a massive disruption in global natural gas supplies following the Russia-Ukraine war. As Russia cuts gas supplies for European nations, they are left searching for alternative destinations to meet their needs, particularly for their power sector. The competition for gas will make it difficult for India, which meets almost half of its supplies through imports. Europe’s aggressive bids for global natural gas will impact India in two ways. Tenders by Indian companies may not get a response as European nations mop up supplies at high prices. Also, unlike with oil, Russia has proved unreliable when it comes to gas supplies for India. GAIL India has a 20-year deal with Gazprom Marketing and Singapore (GMTS), a Gazprom unit, but the Russian company gave up its ownership following western sanctions. The unit subsequently failed to deliver LNG cargoes to GAIL. Indian companies have been trying to make purchases in the spot market, but European countries have been outbidding others. A large chunk of India’s gas imports – almost half – comes from the spot market. It’s now begun to hurt supplies to industries, from the fertilizer to the power sector. India has long term-term contracts with West Asian nations such as Qatar and Saudi Arabia, but there will be a competition for future contracts from European nations.

In fact, S&P Global estimated that natural gas imports to India this year till August declined more than 10%, pointing out the impact of shrinking global supplies and rising prices. And that may be the trend for a while. “Buyers in the country, which meets nearly half of its annual LNG demand through imports, haven’t awarded most of their buy-tenders for spot cargoes this year and have neither made an outright spot purchase since July,” observed S&P Global.

3. The damage to India

The fertilizer industry accounts for almost a third of India’s natural gas consumption, followed by city gas projects as a fuel for cooking and vehicles (21%). Then comes the power sector consumption (14%) and the refinery and petrochemical sector (11%). All of them have faced the impact of rising gas prices. Between April and August, total fertilizer subsidy rose 32% to about ₹1.21 trillion over the same period last year. CNG and PNG prices too have risen 20% to 40% this year. A reduction in gas prices would lead to a cut in CNG and PNG prices, and come as a relief for the common man. The government’s fertilizer subsidy burden would ease as well.

The challenge for the government would be to ensure adequate supplies of natural gas over near-to-medium term. GAIL meets the city gas companies’ needs at a price which is a blend of domestic and imported gas. This blended rate varies every month and can be higher than the government set prices for domestic gas producers.

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