"Overall, the new gas pricing policy augurs well for India's natural gas market. It is expected to increase domestic production by encouraging upstream investment. This will improve India's energy security and increase availability of gas for its key gas-consuming industries," it said.
In the report titled 'Natural Gas Pricing in India: Current Policy and Potential Impact,' EY said the current gas-pricing mechanism is complex and heterogeneous and not conducive for upstream players to realise commercial gains.
"This has resulted in a decline in upstream investments by both public and private players in the last few years, which has negatively impacted growth in the country's natural gas segment," it said.
This, coupled with rising demand for gas, has increased India's dependence on imported liquefied natural gas, making the country the world's fourth-largest importer of LNG.
Since LNG procured through both long-term contracts and from the spot market is highly expensive, India is keen to reduce its dependence on imports.
Higher production will help ease the supply crunch and reduce reliance on high-priced LNG, EY said.
The government, it said, approved a new market-based pricing regime based on recommendations made by the Rangarajan committee last year.
The policy, which was due to come into effect from April and has been put on hold due to the ongoing general elections, is expected to increase certainty and transparency in natural gas pricing in India.
"The approval by the Cabinet Committee on Economic Affairs (CCEA) for movement towards a market-based pricing regime is a step in the right direction. This is expected to attract investments in Indian upstream sector," said Dilip Khanna, Partner, Oil & Gas, EY.
The new policy aims to enhance the commercial viability of gas fields, which would encourage investments in the upstream segment and increase production.
It is also likely to boost the revenue of indigenous gas producers, incentivising them to invest more in the segment.
"Transition of the natural gas pricing regime to market-based pricing will also increase the government's revenue from royalty, taxes and profit petroleum. This can help reduce the subsidy burden of the government, and offset subsidies in sectors like power and fertilisers," Khanna said.
The price of natural gas in India may almost double to USD 8.3 per million British thermal units when the Rangarajan formula is implemented.
Khanna said the government needs to effectively address concerns related to the increased price burden for consumers for the overall success of the policy.
The policy will also increase gas availability for key consuming industries, including power and fertilisers, which may account for about 68 per cent of total demand in FY17.
"However, these sectors are price sensitive and may find it difficult to absorb the increased natural gas prices. Gas-based power plants, which are currently non-functional (6,000 MW of commissioned and 1,000 MW of un-commissioned) due to unavailability of gas, could be brought on stream," the EY report said.
However, generation costs are expected to increase, rendering plants affordable only for peak load purposes.
In the case of the highly subsidised fertiliser sector, production costs would rise as a result of the revised prices, leading to an increase in the government's subsidy burden.