Natural gas pricing in India is heterogeneous and complex in nature. Probably, India is the only country where 15 different types of basic prices of gas are prevailing.

It would be worth mentioning that worldwide, single uniform benchmark price is the prevailing practice in different countries like the US (Henry Hub), the UK (National Balancing Point) and Europe (Zubreggedude index). Complexity in the pricing of natural gas in India has resulted in enormous problems with all the three players?namely producers, sellers and consumers of natural gas. Consumers have been subjected to inequitable situations because they buy their requirement of natural gas at different prices and finally complete for their finished products in the open market. This in turn creates regional imbalances for the market development of natural gas. In a country where the days of matured market of natural gas are still a far cry, there is an immediate need for a single benchmarked price for natural gas.

Historically, the price of gas has witnessed three distinct eras. Prior to 1987, it was a negotiated price broadly guided by replacement of alternative fuel, linkage being mainly with coal. That year saw the first structured pricing order on cost plus basis. Subsequent to pricing orders by Kelkar Committee (1991), Shankar Committee (1997) and finally by the government in 2005, the idea of a market-driven price evolved. The second era in pricing could be linked to prices based on Production Sharing Contracts (PSC) which came as a consequence to the New Exploration and Licensing Policy (NELP). Pricesemerging out of buyer-seller contracts for LNG saw the third pricing regime. However, the price of LNG in the international market fluctuated a lot and in order to protect the customers?particularly the power plants?we arrived at pooled prices for a certain period.

As of today, different prices of natural gas prevailing in the country can be put broadly under three categories. Out of about 140 MMSCMD presently being supplied, almost 40% is based on Administered Pricing Mechanism (APM). Even in case of APM gas, there are six different prices prevailing such as $1.97/MMBTU (power & fertiliser), $1.18 (North Eastern power & fertiliser), $1.42 (North Eastern city gas), $2.36 (small consumers and CGD), $2.46 (power plant in Rajasthan) and also $4.75 (gas purchased at higher cost but sold at APM price). To add to complexity, seven more types of prices are prevailing for gas coming out of production sharing contracts?be it from PMT, RAVVA, KG basin or other fields. The third category is LNG, which is broadly available at prices based on buyer-seller relations, largely governed through the pooled price mechanism decided by government to take care of comparatively high prices of imported gas. Leave aside the gas purchased from a spot LNG market which has ranged from $6 to even $22/MMBTU.

Under the circumstances, the immediate need of the hour is to develop a single benchmarked price of natural gas in India, which will be in the larger interest of the producers, suppliers and consumers, and also benefit the market development of natural gas in this country. The pooled price concept decided by the government in case of LNG has given a good indicator for bringing a simple solution to this complex issue, for a period at least of five years or till the time it reaches market maturity.

It appears that the pooled price option has come to stay in India for a long time. This development has also given insights that can help us arrive at a uniform single price of natural gas based on the pooling mechanism. At present, about 55 MMSCMD gas is APM priced, ranging from $1.12 to $2.5/million BITU and the balance (about 80-85 million cu.m. of gas) is priced in between $3.02 to $5.65/million BITU. The price discovered for KG basin gas by the Empowered Group of Ministers is $4.2/million BITU and it accounts for about 40 MMSCMD of gas, which is around 30% of the total gas supplied.

Now, $4.2 is a reasonably good price for meeting the requirements of producers, sellers and consumers in the present circumstances (or at least till the supply of natural gas comes to match demand). Again, a single price based on the pooling mechanism is probably the answer for current complexity. Selling 52 MMSCMD gas at $ 4.2/MMBTU would fetch an additional corpus of over Rs 11,000 crore annually, whereas balance quantity of about 80-85 MMSCMD of gas (if sold at $4.2/MMSCMD) would require an adjustment of Rs 7,000 crore out of the above corpus annually to keep a single stable price of $ 4.2 / MMBTU for all gas consumers. Therefore, a balance surplus of around Rs 4,000 crore shall still be available, which can be kept for future pooling for a stable single price for five years or so. Out of this surplus, some portion could be passed on to producers of APM gas to meet their ongoing demand of higher price.

Gas pooling will support single gas price in the country, which will bring stability and help the market development of natural gas in the country and also provide much-needed comfort for many gas customers. Probably, this is the answer for all the ongoing issues related to pricing of gas?including litigations.

There is no doubt that such a simple solution for a benchmarked price will require micro-economic studies for fine tuning before we arrive at a single price for natural gas in India. Also, such a single benchmarked price in the country would require an executive order to avoid future litigation. Policymakers should act fast.

?The author is director general of SCOPE and former chairman of GAIL