Explained | India: CNG, PNG to cost less after revision in domestic gas pricing. Here’s how

The Indian government approved the recommendations of a gas panel report, on Thursday (April 6) which would fix the cost of natural gas by imposing a cap or ceiling price and help lower the cost of compressed natural gas (CNG) and piped cooking gas prices (PNG) by up to 10 per cent. The new price cap will come into effect from Saturday, in a bid to control inflation and a major relief to consumers across the country. 
 
Changes to the pricing mechanism

The announcement, on Thursday, was made by the country’s Information Minister Anurag Thakur after a meeting of the Cabinet Committee on Economic Affairs which was chaired by Prime Minister Narendra Modi. PNG will be cheaper by 10 per cent while CNG will cost at least six to nine per cent lesser, said Thakur while addressing a press conference adding that the government will issue a notification in this regard on Friday (April 6) which will come into effect on Saturday (April 8). 

This comes as the natural gas produced from legacy or old fields will now be indexed to the crude oil price as opposed to pricing it based on gas prices in surplus nations such as the United States, Canada and Russia, said the information minister. 

The price will also apply to industrial buyers and companies in the fertiliser and city gas distribution sectors which will be fixed on a monthly basis, reported Reuters. Notably, old fields mostly operated by Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) account for around 80 per cent of India’s annual gas output of about 91 billion cubic metres. The lower prices are set to hit the earnings of these companies. 

The approved revised domestic natural gas pricing guidelines for gas produced from nomination fields of ONGC/OIL, New Exploration Licensing Policy (NELP) blocks and pre-NELP blocks, said the government, in a statement. As of now, these blocks’ Production Sharing Contract (PSC) provides for the government’s approval of prices. 

“The price of such natural gas shall be 10 per cent of the monthly average of Indian Crude Basket and shall be notified on a monthly basis,” said the government, in a statement. 

The gas produced by ONGC and OIL from their nomination blocks and the administered price mechanism (APM) shall be subject to a floor and a ceiling. However, the gas produced from new wells or well interventions in the nomination fields of ONGC and OIL would be allowed a premium of 20 per cent over the APM price, the statement added. 

Previous pricing guidelines

Currently, the domestic gas prices are determined as per the new Domestic Gas Pricing Guidelines, 2014, approved by the government in the same year and provide for the declaration of domestic gas prices for a six-month period based on the volume-weighted prices prevailing at four gas trading hubs. 

The trading hubs in question are Henry Hub, Albena, National Balancing Point (United Kingdom), and Russia for a period of 12 months and a time lag of a quarter. However, the previous guidelines based on the four gas hubs had a “significant time lag and very high volatility,” said the government. Therefore, the revised guidelines will make prices linked to crude oil, a practice now followed in most industry contracts. 

Why now?

Last year, the Indian government set up a committee led by energy expert Kirit Parikh to review gas prices and determine a pricing formula that takes into account the interests of both local consumers and producers. The panel was also asked to ensure after state-set prices of gas from old fields and a ceiling price for output from hard-to-access blocks rose to record highs. 

“The new guidelines are intended to ensure stable pricing regime for domestic gas consumers while at the same time providing adequate protection to producers from adverse market fluctuation with incentives for enhancing production,” said the government in a statement. Furthermore, the reduced prices shall also lower the fertiliser subsidy burden and help the domestic power sector. 

This also comes as the government aims to transition to a gas-based economy and PM Modi’s aim to raise the share of gas in India’s energy mix to 15 per cent by 2030 from 6.2 per cent. Furthermore, it will also contribute to India’s ‘net zero’ carbon-emission goal. 

The panel has since recommended a price range for current production from legacy or old fields. After the announcement, the Indian PM took to Twitter and wrote, “The Cabinet decision relating to revised domestic gas pricing has many benefits for the consumers. It is a positive development for the sector.”

Expected price changes in CNG and PNG

In the national capital, Delhi the current price of CNG is expected to reduce from Rs. 79.56 per kg ($0.97) to 73.59 ($0.90), whereas the price of PNG is expected to drop from Rs. 53.59 ($0.66) per thousand cubic metres to Rs. 47.59 ($0.58). Meanwhile, in Mumbai, CNG is expected to cost Rs. 79 ($0.97) per kg instead of Rs. 87 ($1.06) while PNG may drop to cost Rs. 49 ($0.60) per Standard Cubic Meter (SCM) from the current Rs. 54 ($0.66). 

(With inputs from agencies) 

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