EXCLUSIVE: Pricing concern, supply-side issue can deflate India’s gas plans

The story of the rise in prices of compressed natural gas (or CNG) in India is not just about the way it has affected consumers -- from commuters to drivers of automobiles -- but also its impact on the country's gas plans.
 
Following a Rs 2.50 per kilo hike in the Delhi NCR and Mumbai on Thursday, the fuel has become dearer by nearly Rs 10 in a month. And in the last six months, prices have jumped by more than 40 per cent.
 
India follows a somewhat complex gas pricing system comprising APM and non-APM or free-market gas. The first is sourced from domestic gas fields managed by the public sector Oil and Natural Gas Corp. (ONGC) and Oil India Ltd (OIL), and its price is determined by the Petroleum Planning and Analysis Cell (PPAC), reporting to the Ministry of Petroleum and Natural Gas (MoPNG). The non-APM gas is sourced either from joint venture fields or through imports.
 
This is based on a formula suggested by a six-member panel led by former central bank governor C. Rangarajan in December 2012.
 
With restrictions imposed on the subsidised APM gas supplies in the first three months of the Covid-19 induced lockdown in 2020, the CGD companies increased their purchase of the more expensive non-subsidised, non-APM gas to maintain supplies. The companies also frequently started increasing the price of gas for their retail and industrial customers.
 
To address these concerns, a meeting was summoned by the secretary Ministry of Petroleum and Natural Gas (MoPNG), Pankaj Kumar Jain on April 2, in New Delhi, to discuss the rise in domestic gas prices. The attendees comprised of the chief executives of CGD companies, including Adani, Torrent, Gujarat Gas, Mahanagar Gas, Think Gas, AG&P Pratham and the public-sector natural gas producer and supplier, GAIL.
 
The discussion revolved around the themes of the rise in domestic gas prices and an upward revision in the supply of gas to CGD companies by GAIL. Domestic gas prices have increased first by 62 per cent in October 2021, and then again by 110 per cent on April 22, an increase from $1.9 to $6.1 per MMBtu.
 
Demand to revisit gas pricing formula

To meet the demand and also bridge the shortfall, CGD companies have been purchasing liquefied natural gas (LNG) at $30-35 MMBtu to keep up with the rising demand from CNG and residential users. Gas prices are revised every six months based on a formula that is linked to international gas trading hubs, where the price discovery may be often flawed due to global factors that may have little to no bearing on India. For instance, a spell of cold weather in the EU or the US during the winter months resulting in sharp price increases in those regions may not affect the gas demand in here.
 
"Domestic gas needs a formula that must be linked to local indicators," an executive with a CGD company told Business Today requesting anonymity.
 
Other than CGD players, even exploration and production (E&P) companies such as ONGC and OIL have regularly voiced their concerns on the APM pricing formula since the time it was implemented, analysts tracking the oil & gas sector told BT. The government is expected to soon examine the issue in greater detail.
 
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Moreover, the formula for gas deliveries to CGD companies is assessed on a distorted base that only takes into account the demand in the first three months of the coronavirus pandemic, a time when most economic activities had dipped, CGD companies have alleged. This involves a six-monthly rolling base where 10 per cent extra gas is allocated to a company after taking into account the average of its past six months' outgo.
 
"Once economic recovery started after the first three months of the Covid lockdowns, the shortfall needed to be bridged. Consequently, the cost of APM gas from April 1, 2022, has doubled, leading to price increases by CGD companies," the executive said.
 
Thus, the representatives of CGD companies BT spoke to say they were left disappointed after the nearly two-hour-long meeting.
 
A mail sent to secretary MoPNG's office by BT hasn't elicited a response yet. The story will be updated as when the response comes.
 
Impact on CNG's viability as fuel
 
A representative of a CGD company points out that this rise in prices might have an impact on the attractiveness of gas as an alternative to petroleum-based fuels.
 
"The government's gas utilisation policy has accorded top priority to piped natural gas (PNG) for domestic consumption and CNG for transportation, followed by fertiliser, power and liquefied petroleum gas (LPG). Since there is no incremental increase in the production of APM gas, CGD companies have sought a cut in supplies to other priority sectors so at least their requirements can be met. However, there was no decision on this point either," a senior executive with CGD entity told BT.
 
Furthermore, the oil marketing companies (OMCs) have in the last five months sought an increase in commission paid at oil bunks on CNG sales, citing a marketing study.
 
"Since August last year, the OMCs have unilaterally started charging an increased commission on CNG sales across the country. This is nothing short of an arm-twisting tactic and has further complicated matters," the executive said.
 
The industry body, the Association of CGD Entities (ACE) had even written a detailed note complaining about this matter of increased commissions on CNG sales to the secretary MoPNG on November 23 last year, a copy of which has been accessed by BT.
 
India's gas economy dreams 
 
Prime Minister Narendra Modi has particularly been very emphatic about improving gas connectivity across India through the government's flagship one nation, one grid programme towards doubling the share of gas in the country's energy mix. The shift to a gas-based economy is seen as one of the cornerstones to making Asia's third-largest economy self-reliant and reducing greenhouse emissions.
 
India's medium-term outlook for natural gas consumption remains robust due to rising demand from sectors such as residential, transport and energy, according to International Energy Agency (IEA) data.

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However, factors such as supply constraints, frequent price escalations and rising demand from consumers across sectors as the impact of the coronavirus pandemic ebbs, threaten to derail those plans.
 
"In bidding rounds, 9, 10 and 11 for CGD business, the Petroleum and Natural Gas Regulatory Board (PNGRB) had aggressively marketed the existing CGD business model to attract participation in three rounds. The auctions received a good response on that basis, with 1,000 plus cities covered. Now, if you stop honouring those commitments made under the policy, it may jeopardise the growth of new CGD licensees," another senior executive with a CGD firm argued.
 
A note from the financial services firm IIFL on gas pricing has argued that CGD players will need to increase CNG prices by Rs 12-14 per kilo, to offset the current rise in APM rate. This, and a host of other factors, such as the current geopolitical uncertainty over Ukraine, may cause a huge setback to the country's plans to adopt gas as a cleaner and cheaper alternative unless the Central Government intervenes to rollout a clear strategy to address supply-side issues.