In one of the last reform initiatives in the oil and gas sector, aimed at scaling up local production from fields of ONGC, OIL, Reliance and Vedanta, the government is set to open pricing of domestic gas. According to sources in the oil ministry, freeing up gas pricing is being looked in the present context where global oil and gas prices have fallen. A panel, led by the NitiAayog vice-chairman, has also suggested free-market pricing for natural gas produced from domestic fields to boost output.
“We are looking at proposals on bringing out domestic gas production from pricing regulations. A cabinet note proposing changes would soon be finalised to put in place the new system at the earliest,” said an official privy to the development. But the removal of price regulation in the gas sector will be done gradually as suggested by the Kelkar panel. It means the system of regulated gas pricing for domestic production would continue for at least 3 more years, but during the period producers would be given freedom to sell a portion of the total output under negotiated pricing deals (market determined) with their customers.
The NDA government’s reform initiatives have already allowed free gas pricing for production from small and marginal blocks, difficult high pressure/deep water blocks and output from the newly bid blocks under the hydrocarbon exploration licensing policy (HELP). The pricing and marketing from pre-NELP exploration blocks and those under the new exploration licensing policy (NELP) are still regulated. This will be lifted gradually, once the new policy is approved. The current gas pricing method for pre-NELP and NELP blocks is based on a 2014 formula that takes average rates from global trading hubs to determine domestic prices twice a year – in April and in October.
Under the formula, the current gas price is at $ 3.36 per million metric British thermal unit (mmBtu). Gas producers have been critical of this low pricing that impacts upstream investments. “It’s about time when the government frees up gas pricing, if it’s serious about developing a gas-based economy. Apart from lifting pricing restrictions on domestic gas, the government should also do away with price caps for market-determined price. It would enable market forces and competition to offer best available prices to consumers,” said a senior official of a private sector oil and gas explorer.
At present, producers can charge market rates for gas from deep sea and other difficult fields but rates must stay below a government-prescribed ceiling that’s linked to prices of alternative fuels. The price ceiling is currently at $7.67 per mmBtu. The new policy will look into this ceiling price as well, sources said. India is looking at investor-friendly policies in the oil & gas sector to attract investments that has remained miniscule for the last several years. Due to this, domestic oil output has stagnated and gas production has failed to pick up.
In fact, domestic gas output shrank by 1 per cent in April-October of FY19 raising the demand of expensive imported liquefied natural gas (LNG). The government is aiming to increase gas production by two-and-a-half times by 2030, which would help raise the fuel’s share in the energy mix to 15 per cent from 6 per cent.
At present, of the 310 exploration blocks awarded under various bidding rounds (discovered field, pre-NELP and NELP), 189 blocks/fields are operational. 17 blocks under nomination are being operated by Oil and Natural Gas Corporation and Oil India Limited. The petroleum exploration licences (PEL) for domestic exploration and production of crude oil and natural gas were granted under four different regimes over a period time: nomination basis – PEL, pre-NELP discovered field, pre-NELP exploration blocks and NELP.
As many as 117 entities — 11 public sector undertakings, 58 private firms and 48 foreign companies — are operating in these blocks after the ninth NELP round.