Gas Pricing Linkage In India

GAS PRICING REGULATORY FRAMEWORK FOR THE GAS INDUSTRY

The Ministry of Petroleum & Natural Gas (MOP&NG) has been regulating the allocation and pricing of gas produced by ONGC and OIL by issuing administrative orders from time to time. The gas produced by the JVs and by NELP operators is governed by the respective production sharing contracts (PSC) between the Government and the producers. The setting up of a Petroleum & Natural Gas Regulatory Board is under the consideration of the Government and the bill is being drafted. Under the existing policy, 100% Foreign Direct Investment (FDI) is allowed through the FIPB route for both LNG projects and natural gas pipeline projects. Import of LNG and natural gas is on OGL. If an entity requires the acquisition of Right of User (ROU) in land, it approaches MOP&NG for the acquisition under the Petroleum & Mineral Pipelines (Acquisition of Right of User in Land) Act, 1962 (P&MP Act, 1962). The draft natural gas pipeline policy covering transmission pipelines and local or city gas distribution networks is under formulation, with proposed provision in line with those under the draft regulatory board bill. Pricing of Gas The price of gas is under revision for which the Government of India has set up a committee and it's recommendations are expected soon. Pending finalization of the report, the price of gas as applicable on 31.12.95 is continuing and the current consumer price of gas is Rs. 1850 per thousand cu.m.. (US$ 1.50/MMBTU) exclusive of royalty, taxes and transportation charges. This price is lower than the CIF price of imported high sulpher fuel oil. However, the Government of India has signed production sharing contracts with multinational companies for development and production of various fields. The price of gas to be paid for gas purchased by the Gas Authority of India Ltd. From such joint ventures is linked to a basket of fuel oil. The balance gas may be marketed by the developers at negotiated prices. Demand Registered demand with Gas Authority of India Ltd. For natural gas in the country is around 260 MMSCMD. The Government of India has also constituted an Expert Group to assess the realistic demand for natural gas. This Expert Group has assessed the demand for gas at 146 MMSCMD by the year 2000 and 188 MMSCMD by the year 2004-5. In view of the large difference between availability and demand, natural gas supply is allocated by the Government generally based upon the Imputed Economic Values (IEVs) of natural gas use. Further, in order to utilise natural gas optimally, it is fractionated to derive the value added products and heavier fraction, C2/C3, is being used for petrochemicals industry and LPG as a domestic fuel. An allocation of 92.92 MMSCMD has been made so far. Power and fertilizer

sectors get preference; allocation to power sector amounts to 42.41% and for fertilizer sector 32.05%. Natural gas to the extent of 11% is also being used as a fuel source in industries and balance for production of LPG etc.

The gas industry history in post independent in India can be divided into three phases with respect to major changes. •

Before 1995

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1995 – 2004

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2005 onwards

The scene before 1995: The following were the features of the period before 1995 in the gas pricing in India. •

There was complete Administered Gas Price

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Only State Enterprises ( companies like IOC, BPCL ,OIL etc) were involved

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Gas Sale was only to designated consumers( like fertilizers and power etc )

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100% Government Controlled Single Price for all users and sources on Cost plus basis.

1995-2004 the Reform Period in gas pricing This period is characterized by following main events •

Launch of NELP

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Phased Dismantling of APM

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Increase in Gas Production

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Increasing Demand-Supply Gap

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Foreign participation up to 100%

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World class gas discovery in year 2002 in KG basin

2004 onwards pricing had been developed into the following structure

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60% Government Controlled APM pricing for - Power, Fertilizers, and Small Customers

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Multiple Prices (US$ 2 – 10 / MMBTU) NELP Pricing

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NOC’s – Administered

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Private – Market Related

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RLNG – Market Related

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As of the latest situations, there is Substantial gap in APM price ($ 1.75 - 2.10 / mmbtu) and market price ($3.00 - 9.00 / MMBTU)

As we can clearly see the gas pricing in India is regulated under two categories, first one APM (administered price mechanism) and second one is the price discovery in various phases of NELP Policy. One for gas produced from nomination fields of ONGC and OIL, called the APM regime. The second regime provides for market related pricing, which is applicable to gas produced from Production Sharing Contracts (PSC) by Joint Venture/Private companies and for Re gasified LNG. As per the Production Sharing Contract (PSC) signed by the Government under the New Exploration Licensing Policy (NELP), the operators have the freedom to market the gas in the domestic market on arms length basis. Government does not fix price of gas. The role of the Government is to approve the valuation of gas for the purpose of determining Government take. As per provisions of the Model Production Sharing Contract signed under New Exploration Licensing Policy, the Contractor has the freedom to sell the gas in the domestic market on arms length basis.

The GAS Linkage

Gas Linkage Committee (GLC) which was formed by the Centre in 1991. The objective of the GLC was to ensure effective and optimal utilization of natural gas, through allocation/de-allocation of gas, based on the availability of gas and the demand potential under various administrative ministries. The administrative ministries of core sectors such as fertilizer, power and steel, and other key players such as GAIL, ONGC, and the Planning Commission were members of the GLC under the chairmanship of secretary (petroleum). The minister of petroleum & natural gas was the approving authority who went by the recommendations of the committee. All gas allocations were made keeping in view the gas utilization policy of the government. The GLC had the power to monitor the progress of down-stream gas industry and was also empowered to cancel the allocation if required. However the GLC was winded off in November 2005. Earlier gas produced by ONGC/OIL was allocated to users by the ministry of petroleum, but with the quantity of such ‘Administered Price Mechanism’ gas reducing and NELP gas expected to increase, the ministry said it was time to wind up the Gas Linkage Committee. “The companies have marketing freedom for the gas produced from NELP blocks,” the ministry’s letter said. The existing firms that had got APM gas would continue to get it and any changes in this could be dealt with on a case-to-case basis.