An order from the Petroleum Planning and Analysis Cell (PPAC) of the Oil Ministry increased the price paid for gas produced from old fields, which account for roughly two-thirds of all gas produced in the nation, from $6.1 per million British Thermal Units (mmBTUs) to $8.57 per million BTUs.

The order stated that the price of gas from challenging and more recent fields, such as those in the deep sea D6 block in the KG basin, operated by Reliance Industries Ltd. and its partner British Petroleum PLC, was increased to $12.6 per mmBTU from $9.92.

These are the highest rates for managed/regulated fields and free-market areas, such as ONGC’s Bassein field off the coast of Mumbai (such as the KG basin).

Also, this will be the third increase in rates since April 2019 and comes on the back of firming benchmark international prices.

Inputs such as gas are used to produce electricity as well as fertiliser. Additionally, it is transformed into CNG and pumped into residential kitchens for use in cooking. A steep increase in prices is likely to reflect in higher rates for CNG and piped natural gas (PNG), which has in the last one year risen by over 70%.

Why this hike?

Every six months, on April 1 and October 1, the government sets the price of gas based on rates common in countries with gas surpluses like the US, Canada, and Russia in a year with a lag of one quarter.

So, the price for 1 October to 31 March is based on the average price from July 2021 to June 2022. This is the period when global rates shot through the roof.

Attempt to control the price

The government has established a committee to review the pricing formula because higher gas prices could potentially fuel inflation, which has been stubbornly above the RBI’s comfort zone for the past eight months.

The committee, led by former planning commission member Kirit S. Parikh, was asked to submit a report by the end of September with a “fair price to the end-consumer” recommendation.

The government had in 2014 used prices in gas surplus countries to arrive at a formula for locally produced gas. The rates according to this formula were subdued and at times lower than the cost of production till March 2022 but rose sharply thereafter, reflecting the surge in global rates in the aftermath of Russia’s invasion of Ukraine.

From 1 April, the cost of gas from old fields—which is primarily produced by state-owned companies like ONGC and Oil India Ltd.—was more than doubled to $6.1 per mmBTU.

Similarly, the rates paid for gas from difficult fields such as deep sea KG-D6 of Reliance went up to $9.92 per mmBTU from 1 April against $6.13 per mmBTU.

According to a directive from the oil ministry, the panel has been asked to recommend a fair price to end-users as well as a “market-oriented, transparent and reliable pricing regime for India’s long-term vision for ensuring a gas-based economy.”

The government wants to more than double the share of natural gas in the primary energy basket to 15% by 2030 from the current 6.7%.

The volume-weighted average of the price prevalent in a 12-month period in US-based Henry Hub, Canada-based Alberta gas, UK-based NBP and Russia gas are used to fix prices for administered fields of ONGC and Oil India Ltd.

A slightly modified formula is used for challenging fields, such as discoveries in deepwater, ultra-deepwater, and high pressure/high temperature regions, by factoring in the price of LNG, which also skyrocketed in 2021.

Reliance-British Petroleum PLC operated KG fields are classified as difficult fields.

Implications of price rise

According to sources, cities like Delhi and Mumbai will likely see an increase in the cost of CNG and piped cooking gas as a result of the rising gas prices.

Additionally, it will increase the cost of producing electricity, though consumers might not notice a significant increase in costs given how little power is produced using gas currently.

Similarly, the cost of producing fertiliser will also go up but as the government subsidises the crop nutrient, an increase in rates is unlikely. For producers, it will bring in higher revenues.

(With inputs from PTI)