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GAS PRICING

REGULATORY FRAMEWORK FOR THE GAS INDUSTRY


The Ministry of Petroleum & Natural Gas (MOP&NG) has been regulating the
allocation and pricing of gas produced by ONGC and OIL by issuing administrative
orders from time to time. The gas produced by the JVs and by NELP operators is
governed by the respective production sharing contracts (PSC) between the
Government and the producers. The setting up of a Petroleum & Natural Gas
Regulatory Board is under the consideration of the Government and the bill is being
drafted.
Under the existing policy, 100% Foreign Direct Investment (FDI) is allowed
through the FIPB route for both LNG projects and natural gas pipeline
projects. Import of LNG and natural gas is on OGL. If an entity requires the
acquisition of Right of User (ROU) in land, it approaches MOP&NG for the
acquisition under the Petroleum & Mineral Pipelines (Acquisition of Right of
User in Land) Act, 1962 (P&MP Act, 1962). The draft natural gas pipeline
policy covering transmission pipelines and local or city gas distribution
networks is under formulation, with proposed provision in line with those
under the draft regulatory board bill.

Pricing of Gas
The price of gas is under revision for which the Government of India has set up a
committee and it's recommendations are expected soon. Pending finalization of the
report, the price of gas as applicable on 31.12.95 is continuing and the current
consumer price of gas is Rs. 1850 per thousand cu.m.. (US$ 1.50/MMBTU) exclusive
of royalty, taxes and transportation charges. This price is lower than the CIF price of
imported high sulpher fuel oil. However, the Government of India has signed
production sharing contracts with multinational companies for development and
production of various fields. The price of gas to be paid for gas purchased by the
Gas Authority of India Ltd. From such joint ventures is linked to a basket of fuel oil.
The balance gas may be marketed by the developers at negotiated prices.
Demand
Registered demand with Gas Authority of India Ltd. For natural gas in the
country is around 260 MMSCMD. The Government of India has also
constituted an Expert Group to assess the realistic demand for natural gas.
This Expert Group has assessed the demand for gas at 146 MMSCMD by the
year 2000 and 188 MMSCMD by the year 2004-5. In view of the large
difference between availability and demand, natural gas supply is allocated
by the Government generally based upon the Imputed Economic Values
(IEVs) of natural gas use. Further, in order to utilise natural gas optimally, it is
fractionated to derive the value added products and heavier fraction, C2/C3,
is being used for petrochemicals industry and LPG as a domestic fuel. An
allocation of 92.92 MMSCMD has been made so far. Power and fertilizer
sectors get preference; allocation to power sector amounts to 42.41% and for
fertilizer sector 32.05%. Natural gas to the extent of 11% is also being used
as a fuel source in industries and balance for production of LPG etc.

The gas industry history in post independent in India can be divided into three
phases with respect to major changes.

• Before 1995

• 1995 – 2004

• 2005 onwards

The scene before 1995:

The following were the features of the period before 1995 in the gas pricing in India.

• There was complete Administered Gas Price

• Only State Enterprises ( companies like IOC, BPCL ,OIL etc) were involved

• Gas Sale was only to designated consumers( like fertilizers and power etc )

• 100% Government Controlled Single Price for all users and sources on Cost
plus basis.

1995-2004 the Reform Period in gas pricing

This period is characterized by following main events

• Launch of NELP

• Phased Dismantling of APM

• Increase in Gas Production

• Increasing Demand-Supply Gap

• Foreign participation up to 100%

• World class gas discovery in year 2002 in KG basin

2004 onwards pricing had been developed into the following structure
• 60% Government Controlled APM pricing for

- Power, Fertilizers, and Small Customers

• Multiple Prices (US$ 2 – 10 / MMBTU) NELP Pricing

– NOC’s – Administered

– Private – Market Related

– RLNG – Market Related

• As of the latest situations, there is Substantial gap in APM price ($ 1.75 - 2.10
/ mmbtu) and market price ($3.00 - 9.00 / MMBTU)

As we can clearly see the gas pricing in India is regulated under two categories, first
one APM (administered price mechanism) and second one is the price discovery in
various phases of NELP Policy.

One for gas produced from nomination fields of ONGC and OIL, called the APM
regime. The second regime provides for market related pricing, which is applicable
to gas produced from Production Sharing Contracts (PSC) by Joint Venture/Private
companies and for Re gasified LNG.
As per the Production Sharing Contract (PSC) signed by the Government under the
New Exploration Licensing Policy (NELP), the operators have the freedom to market
the gas in the domestic market on arms length basis. Government does not fix price
of gas. The role of the Government is to approve the valuation of gas for the
purpose of determining Government take.

As per provisions of the Model Production Sharing Contract signed under New
Exploration Licensing Policy, the Contractor has the freedom to sell the gas in the
domestic market on arms length basis.
The GAS Linkage

Gas Linkage Committee (GLC) which was formed by the Centre in 1991. The
objective of the GLC was to ensure effective and optimal utilization of natural gas,
through allocation/de-allocation of gas, based on the availability of gas and the
demand potential under various administrative ministries. The administrative
ministries of core sectors such as fertilizer, power and steel, and other key players
such as GAIL, ONGC, and the Planning Commission were members of the GLC under
the chairmanship of secretary (petroleum). The minister of petroleum & natural gas
was the approving authority who went by the recommendations of the committee.
All gas allocations were made keeping in view the gas utilization policy of the
government. The GLC had the power to monitor the progress of down-stream gas
industry and was also empowered to cancel the allocation if required.

However the GLC was winded off in November 2005. Earlier gas produced by
ONGC/OIL was allocated to users by the ministry of petroleum, but with the quantity
of such ‘Administered Price Mechanism’ gas reducing and NELP gas expected to
increase, the ministry said it was time to wind up the Gas Linkage Committee. “The
companies have marketing freedom for the gas produced from NELP blocks,” the
ministry’s letter said. The existing firms that had got APM gas would continue to get
it and any changes in this could be dealt with on a case-to-case basis.