Let gas flow freely | The Financial Express

Let gas flow freely

Parikh panel’s bold proposals may lead to a dynamic domestic market

Let gas flow freely
Of 180 million standard cubic metre per day (mmscmd) of gas consumed in the country in FY22, only 95 mmscmd was domestically produced and the balance was imported.

Crisis has been turned into an opportunity by the Kirit Parikh committee. Keeping consumer interest in mind, it has recommended a lower price band of $4-6.5 mmBtu compared to the current record-high level of $8.57, for the gas being taken out from the “legacy fields” accounting for over two-thirds of domestic output in the short-term. But, it simultaneously pitched for complete pricing freedom for all domestic gas producers by January 2027, a policy shift which would have been hugely controversial had it been attempted a few years earlier. In fact, for the geologically difficult fields like the several high-potential (and headline-grabbing) assets in the 50,000 square km Krishna Godavari (KG) basins off the Andhra Pradesh coast, the panel wants fully market-determined pricing to start even a year earlier. Also, no price reduction or band is proposed for such gas (which is priced at a stratospheric $12.46/mmBtu for second half of FY23 compared with just $1.79 in second half ofFY21) even for the short term. The concession is despite the fact that the formulaic, internationally bench-marked price has no correlation with cost.

The producers are now making super-normal profits, though the costs may still need to be recovered in most cases. Not just the Reliance-bp combine which has plans to ramp up its KG-D6 gas production manifold (the promising MJ field is soon to go on stream) under a free-pricing regime, but ONGC too has high stakes in its KG assets. The state-run hydrocarbon producer is expecting peak oil and gas output from its KG-D5 project in 2023-24, by quickly reversing a recent slide. Pricing freedom will doubtless encourage both RIL-bp and ONGC to fast-track their deep-water production schedules, and scale up domestic production of this vital fuel/industrial feedstock with massive capital investments in not just production but also in fresh exploration. Others, who have set an eye on this high-risk-high-reward business, like Vedanta, might also take the plunge.

Also Read: Parikh panel moots lower price band for APM gas; pricing freedom from 2027

The immediate trigger for the review of gas pricing is the skyrocketing of international prices over the past year – prices soared to “impossible” levels of over $60 on many occasions – as post-pandemic global economic recovery coincided with a sharp reduction in Russian supplies. Gas and LNG prices have got de-linked from the crude oil market, as geopolitics turned turbulent. Higher international gas prices have had a direct bearing on domestic prices. All users have borne the brunt of the elevated cost of the input and the government too has taken a direct hit. The dynamics of India’s gas economy has remained skewed, primarily because of the low levels of domestic production. Given the uncertainties over pricing, investors have chosen to tread cautiously, resulting in an unexpected stagnation in production over the last few years and a drying down of new discoveries. Of 180 million standard cubic metre per day (mmscmd) of gas consumed in the country in FY22, only 95 mmscmd was domestically produced and the balance was imported. Of course, the potential gas requirement of the country is far higher than this.

Thankfully, a renewed enthusiasm is seen among the players, with RIL-bp targetting to raise KG-D6 output to 27-28 mmscmd in FY24 from 19 mmscmd at present, and ONGC also focusing on its assets in the basin. The prospects of pricing freedom and the incentives like the simpler revenue sharing model under the Hydrocarbon Exploration and Licensing Policy (HELP) are stimuli for them. That said, problems of the Indian gas market will be far from over, so long as the supply shortfall persists.

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First published on: 03-12-2022 at 04:00 IST