The government decision to raise the administered pricing mechanism (APM) gas price has received a thumbs-up from the CMD and shareholders of Oil and Natural Gas Corp (ONGC) alike, as is evident from the movement in its share price. With most of this gas being utilised in the price-regulated sectors — 41 out of 55 million metric standard cubic meter per day (mmscmd) of APM gas is used in power and urea units — no direct impact of this decision is likely to be felt in the open gas market.
Further, as trends indicate, these supplies that are coming from ageing gas fields, whose volumes are on the downswing, do not hold much significance for new sale and purchase contracts. However, this decision has far-reaching implications for the energy sector of the country owing to several reasons.
On the policy front, this decision to price APM gas on the basis of competitively-derived prices — the gas price of $4.20 per mmBtu was approved in 2007 through the bidding process in the case of D-6 gas fields — gives a quiet burial to the recommendation contained in the Integrated Energy Policy, which received government consent in 2008, that gas prices should not be fixed on the basis of competitive bids.
Again, on the policy front, this decision endorses the view that subsidies should be given at the output rather than the input stage. This provides a level playing field to our oil and gas upstream PSUs. At the new gas price, the government may still hold the urea price by raising the fertiliser subsidy, but then it would be directly subsidising the plants, rather than the earlier practice of ONGC and Oil India (OIL) subsidising them through cheaper gas supplies. All gas producer prices now being determined on a market basis may become a precursor for the oil sector.
The government had already accepted, in 2006, the recommendation of an inhouse committee on New Exploration Licensing Policy (Nelp) gas price issues, that price discovery undertaken in one case of gas supply may serve as a basis for newer supplies. In the case of APM gas, it is not possible to determine the price on the basis of competitive bidding because gas prices are a pass-through for a majority of consumers.
Therefore, given the circumstances, the government has rightly adopted the D-6 price for APM gas. With this, nearly 80% of domestic supplies will now be sold at one price, facilitating the allocation of Nelp gas to common users of the two sources.
However, if the prices of future supplies of domestic gas are to be fixed — as has been decided by the government — on the basis of recent competitive bids, a transparent and fair process of price discovery, which addresses the concerns of an economy where true market conditions may not always exist, is imperative.
In addition, since the government has decided to even approve the price discovery process in future Nelp contracts, and the Supreme Court having endorsed its pre-eminent role in price fixation, there is an urgent need for a comprehensive gas price discovery policy.
Further, as trends indicate, these supplies that are coming from ageing gas fields, whose volumes are on the downswing, do not hold much significance for new sale and purchase contracts. However, this decision has far-reaching implications for the energy sector of the country owing to several reasons.
On the policy front, this decision to price APM gas on the basis of competitively-derived prices — the gas price of $4.20 per mmBtu was approved in 2007 through the bidding process in the case of D-6 gas fields — gives a quiet burial to the recommendation contained in the Integrated Energy Policy, which received government consent in 2008, that gas prices should not be fixed on the basis of competitive bids.
Again, on the policy front, this decision endorses the view that subsidies should be given at the output rather than the input stage. This provides a level playing field to our oil and gas upstream PSUs. At the new gas price, the government may still hold the urea price by raising the fertiliser subsidy, but then it would be directly subsidising the plants, rather than the earlier practice of ONGC and Oil India (OIL) subsidising them through cheaper gas supplies. All gas producer prices now being determined on a market basis may become a precursor for the oil sector.
The government had already accepted, in 2006, the recommendation of an inhouse committee on New Exploration Licensing Policy (Nelp) gas price issues, that price discovery undertaken in one case of gas supply may serve as a basis for newer supplies. In the case of APM gas, it is not possible to determine the price on the basis of competitive bidding because gas prices are a pass-through for a majority of consumers.
Therefore, given the circumstances, the government has rightly adopted the D-6 price for APM gas. With this, nearly 80% of domestic supplies will now be sold at one price, facilitating the allocation of Nelp gas to common users of the two sources.
However, if the prices of future supplies of domestic gas are to be fixed — as has been decided by the government — on the basis of recent competitive bids, a transparent and fair process of price discovery, which addresses the concerns of an economy where true market conditions may not always exist, is imperative.
In addition, since the government has decided to even approve the price discovery process in future Nelp contracts, and the Supreme Court having endorsed its pre-eminent role in price fixation, there is an urgent need for a comprehensive gas price discovery policy.
Source: Economic Times
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