India’s gas prices: Two systems, one country
There are two gas-pricing mechanisms in India: the Administered Pricing Mechanism (APM) and the regime included in the New Exploration Licensing Policy (Nelp)
The price of imported LNG is not state-set and depends on bilateral contract negotiations and the international spot market.
Implemented in 1987, the APM was the government’s attempt to encourage production from state-chosen nominated gas fields and undeveloped fields, via the Discovered Fields Exploration Policy (DFEP). Under DFEP, private companies, working with India’s state-run firms, negotiated prices through production sharing contracts for undeveloped fields. Once on stream, the gas is sold via state-owned company Gail at APM prices.
Prices for APM and DFEP gas are set by the government via the state-runs firms or by a fixed formula agreed by private companies in joint ventures. It is the main pricing regime for selling gas to the power and fertiliser sectors.
Although there were notable APM gas increases in 1992, 1997, and 2005, prices stayed below production cost, so state-owned companies, mainly India’s Oil and Natural Gas Corporation (ONGC), had to bear the difference. But because the state-owned companies were making money in other business, these subsidies are not regarded as losses but “under-recoveries”.
But in May 2010, APM gas more than doubled to $4.20/million British thermal units (Btu) from $1.80/m Btu, bringing gas prices closer to the true cost of production. The rise also reduced some of the price distortion, bringing APM more in line with gas produced under the Nelp pricing mechanism.
Nelp was introduced in 1998, and aimed to encourage exploration and production. Pricing for gas produced from fields developed under the Nelp regime still evolving, but it is expected that gas priced under the policy will overtake APM and therefore make it the most relevant pricing mechanism.
Nelp helped see domestic gas production almost double over the last decade to 52.34 billion cm/y in 2010, Cedigaz data showed. Gas produced under Nelp allows gas producers to “discover” the price of gas themselves. But they are still required to get its “value” from the government which is reviewed every five years.
Nelp states that the “discovered price” should not be lower that the “government-determined value”, which means the government effectively sets a floor on gas prices, and therefore protects the state’s royalty and profit margins (see Nelp guidelines below). This has resulted in gas being sold at multiple prices.
However, Nelp has inconsistencies which could explain why foreign firms have not invested heavily in India’s gas upstream. For example, while Nelp gives producers marketing freedom to sell gas domestically, the government is also allowed to allocate gas according to its gas utilisation policy.
During the first decade of Nelp’s implementation, the government did not exercise its right to allocate gas. However, it did for Reliance Industries’ D6 block, in the Krishna Godavari basin, with output prioritised to urea manufacturers first, followed by liquefied petroleum gas (LPG) production plants.
Government guidelines for pricing under Nelp:
a) Gas should be sold at “market” price;
b) The royalty and profit petroleum of the government should be calculated on the basis of the value;
c) Although the value and price could be different, the higher number should be taken as the value often entire quantity of gas;
d) The government’s role in undertaking an exercise to determine the value of gas arises when the prices have not been determined on the basis of competitive bidding; and
e) Ideally, the value should be ‘discovered’ through an open bidding process.