Government slashes domestic natural gas prices amid major pricing overhaul

New Delhi: The Ministry of Oil revealed that the price of domestic natural gas has been reduced to USD 8.44 per million metric British thermal units (mmBtu) for June 2024, down from USD 8.90 in the previous month.

Despite this reduction, the price of domestic natural gas will remain capped at USD 6.5 per mmBtu according to the current pricing formula.

The adjustment follows the new gas pricing mechanism implemented by the government, which sets a floor price of USD 4 per mmBtu and a ceiling price of USD 6.5 per mmBtu for domestic gas.

This mechanism applies to natural gas produced from legacy and oil fields managed by Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Limited (OIL).

Under the new pricing regime, domestic gas prices are linked to the prices of imported crude, specifically pegged at 10 per cent of the Indian crude basket. The government updates these prices monthly to reflect current market conditions.

This pricing reform was initiated based on recommendations from a government-appointed panel led by Kirit Parikh, a former member of NITI Aayog and an energy expert.

The panel was established in 2022 to overhaul the existing pricing structure for domestically produced natural gas, aiming to stabilize the market for both producers and consumers.

The primary goals of the Parikh committee were to boost domestic gas production to meet the target of deriving 15% of India's energy from natural gas by 2030, while also ensuring fair pricing for consumers.

The committee recommended a fixed pricing band for gas from legacy fields, which constitute two-thirds of the country's total natural gas production.

This strategy was designed to provide a stable pricing regime for producers and mitigate the impact of international market fluctuations on CNG and piped cooking gas prices.

One of the key recommendations was to link the price of gas produced by state-owned companies from fields allocated on a nomination basis to imported crude oil prices, instead of international gas rates.

As per the new regime, ONGC and OIL will receive prices based on imported oil rates, with a minimum floor price of USD 4 per mmBtu and a ceiling of USD 6.5 per mmBtu.

The ceiling rate for APM gas from legacy fields will see an annual increment of USD 0.5 per mmBtu.

The panel advised maintaining the current pricing formula for gas fields with challenging geologies, such as Reliance Industries and British Petroleum plc's KG-D6.

Additionally, it recommended integrating natural gas into the Goods and Services Tax (GST) regime to streamline taxes by combining the central excise duty and the various state VAT rates.

Prioritization of city gas in the allocation of APM gas was another crucial recommendation, ensuring that this sector falls under the 'no-cut' category. This means that in the event of a production decline, supplies to other consumers will be curtailed first.

The government accepted all of the Kirit Parikh committee's recommendations in 2023, leading to significant decreases in the prices of Piped Natural Gas (PNG) for households and Compressed Natural Gas (CNG) for transport.

These reforms also helped reduce the government's fertilizer subsidy burden and assisted the domestic power sector in managing the cost of gas-powered electricity generation.