EXCLUSIVE: How Kirit Parikh outlined the biggest reform in India’s gas sector

If there is a doyen of India’s oil & gas sector, it is Prof. Kirit Parikh (82). In a career spanning more than 50 years, he has served as chairman of the Integrated Energy Policy Committee of the erstwhile Planning Commission and been a member of the Economic Advisory Council (EAC) reporting to prime ministers Atal Behari Vajpayee, PV Narasimha Rao, Chandra Shekhar, VP Singh and Rajiv Gandhi. The recommendations made by an expert committee led by him in November last year, resulted in the government unveiling the much-needed pricing reform in the country’s gas sector late Thursday night, which will result in PNG and CNG getting cheaper by 10 per cent. In an exclusive interaction with Business Today, Prof. Parikh outlines how the expert panel worked out its key recommendations and the need to ramp up investments in gas exploration to significantly enhance production. A Padma Bhushan awardee, he is a doctor of science in civil engineering and a masters degree in economics from the prestigious Massachusetts Institute of Technology (MIT).

BT: What led to the committee on gas pricing headed by you making those recommendations?

KP: We currently have about 14 different regimes on gas pricing. The first set was the administered price mechanism (APM) gas allocated for fields allotted to the Oil and Natural Gas Commission (ONGC) and Oil India Ltd (OIL). And those fields produce 70 per cent of the country’s output. The APM gas is under government-controlled pricing and distribution. There are other fields allotted under the different regimes of the hydrocarbon licensing policy, with profit sharing, revenue sharing, cost sharing, and all kinds of agreements in place. The producers have pricing freedom, but that is subject to an upper ceiling periodically revised by the government. And a third route was allotted in February 2019 that allows total pricing and marketing freedoms. Now, the price that was being set for APM gas was based on a formula that equated the weighted average producer price to Canada, the US, the EU and Russia. That varied widely as gas prices dramatically moved upwards and downwards. When the price of gas was $1.79 MMBtu about a year ago, that did not even cover the margin of the cost of production of ONGC and OIL, which is around $3-3.5 MMBtu. As a result, the public sector oil & gas majors have been making losses. And suddenly a few months ago, the price went to $6.5. So, the regime needed to be simplified and clarified.

BT: Why was it important to devise a new pricing formula?

KP: There are a few important reasons for this. Firstly, the country has a target of increasing the contribution of gas in the country’s total energy basket to 15 per cent from the current 6.5 per cent. Even at 6.5 per cent, we are importing nearly 50 per cent of our gas. If you want the volume to go up to 15 per cent, you ought to increase domestic production substantially. At the same time, you have certain preferred consumers under socially desirable consumption. That includes ensuring piped natural gas (PNG) supplies to households and CNG to the transportation sector in urban areas. When people use dirty fuels, it leads to all kinds of cardiovascular diseases, eye infections and premature deaths. Based on a large survey we had at one point estimated in a study for the Indira Gandhi Institute of Development Research (IGIDR) that nearly a million people die yearly of urban and indoor air pollution. Liquified petroleum gas (LPG) is also a clean fuel, but that is also imported. If you want to reach LPG to all rural consumers, you need to free up cylinders being used in urban areas. So, the idea is to promote higher use of CNG and PNG in urban areas. The government wanted to have a system of pricing that would likely lead us to a 15 per cent share and, at the same time, also protects the kind of consumption that the country would like to encourage.

BT: How did you go about drafting the key recommendations of the report?

KP: Firstly, we had to set the price for APM gas. What we said is there is a floor price and a ceiling price. The floor price should be equal to covering the marginal cost of production for the public sector ONGC and IOL as well as ensuring they earn some profit. At the same time, we wanted to keep the ceiling price at such a level that it should really make it possible for consumers to give preference to PNG or CNG. If the prices go up, the consumers will go for LPG. Similarly, in the case of CNG consumers, they might return to using diesel vehicles. Within this bound, the price had to be fixed to align with the average cost of the Indian basket for importing crude oil in the previous month. And why was it linked to crude oil? That’s because when you have gas prices related to crude oil prices, you can be sure the domestic consumer will find PNG and CNG to be cheaper than LPG and diesel. Besides, even in comparison to BS-VI vehicles CNG vehicles cause less pollution.

BT: Another important area that you have addressed is investments in exploration to increase production…

KP: If you want Indian and foreign investments in exploration and licensing, they need to have total pricing and marketing freedoms. There are so many contracts and agreements that can’t be changed overnight as that would lead to chaos in the market. Therefore, we recommended moving to a total market-determined price within three years’ time by January 1, 2027. This will help attract investors to gas exploration and sell at whatever price they want. Keeping the ceiling price was also causing a problem for one doesn’t know if the government is going revise it upwards or downwards. And that kind of uncertainty about government policy – the so-called ‘government risk’ in India – is perceived to be really high. The main issue, therefore, was to determine the pricing regime for APM gas on the floor and ceiling [prices] and set the price accordingly. For other gases, we have recommended gradually moving on them over a three-year period to let the market influence their pricing.

BT: What is your view on the recently announced reform for a unified tariff on the gas transmission?

KP: Ideally, pricing should be determined by the market. Like, if you are at a distance from the production centre, you should be paying a higher price. However, if you wish to promote socially desirable consumption then you may want to introduce some constraints. In my view, this policy is designed to make sure that people have easier access to gas.

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