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Published:Tuesday, February 11, 2020 11:30 AM

Natural Gas Pricing Mechanism in India: Challenges and Opportunities

Natural Gas Pricing Mechanism in India: challenges and opportunities

Natural gas is currently having around 7% of share in India’s energy mix which is expected to reach 15% by 2030 as per the target set by the government of India. India is 4th largest consumer of natural gas where 52% demand is fulfilled by domestic production and the remaining 48% by LNG import during FY 2018-19. In December month domestic production accounted for 47% of total natural gas consumption. Government efforts toward the natural gas-based economy are visible as investing massive amounts in building infrastructure and making supportive policy. Natural gas pricing is one of the most important factors that is affecting the natural gas industry and the associated sectors for a very long time. Pricing of natural gas is one of the major issues which is still looming Due to significant variations in the natural gas pricing (APM and non APM gas) there is an imbalance of economics for different end-users in India. The creation of a free gas market is vital for increasing competition in the gas sector and moving closer to the establishment of a gas-based economy. For a successful natural gas-based economy, it is required that a benchmark price be set. This benchmark price will create healthy gas on gas competition between domestic production and the LNG Importer.
Structure of Natural gas prices-At first glance, gas pricing in India appears notoriously complicated, as there are a variety of different prices at the wellhead. In a nutshell, the price of domestic gas to producers is set according to the terms of the fiscal regime that governs a producing field. To this are then added transportation costs, marketing margins, and state taxes to obtain the delivered price for gas. As states have fiscal autonomy over indirect taxes, these tax rates tend to differ between states. Broadly, there have been three fiscal regimes for gas exploration and production in existence at any one time. Producing fields thus operate under parallel fiscal systems, leading to different prices at the wellhead.
  • The Nomination regime (also known as the Administered Pricing Mechanism or ‘APM’), existed prior to the liberalization of the upstream sector in the 1990s, covering most of the ‘legacy’ fields of the two largest NOCs – ONGC and OIL.
  • The Discovered Fields regime (also known as the Pre-New Exploration Licensing Policy regime or ‘Pre-NELP’) was a semi-liberalized system brought in during the early 1990s to replace the Nomination regime, enabling joint ventures between private companies and the NOCs – which typically had a 30% carried interest.
  • The New Exploration Licensing Policy (NELP) replaced the Pre-NELP regime in 1999 and was the main fiscal regime for upstream exploration and production of March 2015, based on Production Sharing Contracts.
Policy reforms: Rangarajan Committee Recommendations-2014
Proposed price takes input from:
  • The netback price of Indian LNG import at the wellhead of the exporting countries
  • Average of pricing prevailing at trading points of transactions i.e. hubs or balancing points of major markets of continents. 
  • The weightage average of natural gas price in three major markets (North America- at Henry Hub, Europe & Eurasia- at NBP and Japan- netback price at source for Japan).
  • The average of the price calculated to be taken as price for India which is economically appropriate estimation of the arm’s length competitive prices applicable for India. 
  • The methodology neutralizes any bias for India as the data come from a wide range of transactions globally including in India
Formula recommended by Rangarajan Committee
Guidelines specifies the formula for the Domestic Natural Gas Price calculation which is as follows:



  •  VHH is the total annual volume of natural gas consumed in the USA and Mexico.
  • VAC is the total annual volume of natural gas consumed in Canada.
  • VNBP is the total annual volume of natural gas consumed in the EU and FSU, excluding Russia.
  • VR is the total annual volume of natural gas consumed in Russia.
  •  PHH and PNBP are the annual average of daily prices at Henry Hub (HH) and National Balancing Point (NBP), respectively, less $0.50/MMBtu towards transportation and treatment charges.
  •  PAC and PR are the annual average of monthly prices at the Alberta ‘Hub’ and in Russia, respectively, less $0.50/MMBtu towards transportation and treatment charges.
Under the new reforms:
  • There is no distinction between APM and non APM pricing and there is uniform price for gas produced by NOCs from nomination and NELP blocks. Therefore, the supplies made by NOCs to existing customers (without calling for bids) would be at the price worked out as per these guidelines (presently US$ 3.02 GCV Oct 2019 to March 2020). Prices will be reviewed every 6 months, based on trailing price and volume data for the previous four quarters with a lag of one quarter.
Domestic Natural Gas price in
Gas price ceiling in US$/MMBTU
November 2014 - March 2015
April 2015 - September 2015
October 2015 - March 2016
April 2016 - September 2016
October 2016 - March 2017
April 2017 - September 2017
October 2017 - March 2018
April 2018 - September 2018
October 2018 - March 2019
April 2019 - September 2019
October 2019 - March 2020
  • The price is set on the basis of Gross Calorific Value (rather than Net Calorific Value under the previous system of gas pricing).
  • In case of new supplies or where the duration of existing contracts has been completed the price would be determined by NOCs by calling bids through an open competitive bidding process.
  • The bids by NOCs shall be based on the price and shall be awarded to the highest bidder. The reserve price for these bids would be equal to the price notified on the basis of New Domestic Gas Pricing Guidelines, 2014 at the time of calling of bids.
  • The new gas price is applicable to all gas produced from Nomination Regime (legacy) fields given to the NOCs - ONGC and Oil India Limited – new NELP blocks, such Pre-NELP blocks where the Production Sharing Contract (PSC) provides for Government approval of gas prices, and Coal Bed Methane blocks. The new gas price does not apply to:
·         Small and isolated fields under the Nomination Regime (legacy) blocks of the NOCs.
·         Instances where prices have been fixed contractually for a certain period of time, till the end of such a period.
·         Instances where the PSC provides a specific formula for natural gas price indexation or fixation.
·         Pre-NELP regime blocks where government approval is not required under the Production Sharing Contract (PSC).
Pricing of LNG Imports
The price of imported LNG is not controlled / fixed by the Government. The price of Long Term, Medium Term and Short-Term R-LNG is based on the pricing formula agreed between the buyer and the seller, whereas the price of Spot LNG varies from cargo to cargo depending on international demand supply position. The imported LNG sourced from the international markets can be divided into following three categories:
  • Long Term
  • Medium and Short Term
  • Spot
Market Dynamics
India’s domestic natural production holds around 52% of total consumption hence pricing of natural gas plays a vital role in the growth of the industry. Amorphous pricing affecting growth and demand from the sectors associated such as fertilizers, power, CGD, etc. India’s gas price reforms (including the Rangarajan proposals) have focused on managing the price level, rather than finding a logical, market-based mechanism for price formation. This is reflected in some of the mixed rationale expressed in the report of the Committee tasked with reviewing the Rangarajan formula. Gas producers in India arguing for the deregulation of gas prices and their pegging to international benchmarks in order to obtain higher prices have been equally affected financially. This also impacting the government set target to increase the consumption of natural gas from 6.5% to 15 % in the energy mix by 2030. Budget 2020 indicating to have a transparent pricing structure for domestic natural gas and developed infrastructure in the coming years.
  • Pricing of tradable energy (Coal, Oil, Gas) at trade parity (TPP) at the point of sale
  • TPP will ensure economically rational pricing of inter fuel
  • To cushion domestic prices against short term volatility of price in international market (FOB or CIF) a variable levy could be used so that domestic price track median prices over the previous month or a three-month period
  • Domestic gas price linking to spot LNG long term LNG misleading
  • Linking Gas price to Crude is misleading since gas is not as easily tradable as crude oil
  • Pricing by competition amongst producers and users
  • No competition from Fertilizers and Power since Gas cost is pass through 

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