Kirit Parikh Committee recommends paying 20% premium over cost of production to ONGC, OIL

5 Dec 2022 , 08:14 AM

The Kirit Parikh Committee has recommended paying ONGC and OIL a premium of 20% over the cost for any new gas production they get from old fields. The committee had previously recommended a floor and ceiling price for natural gas produced from legacy fields of state-owned producers to control input prices for CNG and fertilizer.

According to a copy of the study accessed by PTI, the panel proposed setting the benchmark price of natural gas generated from ONGC and OIL’s legacy or ancient fields, known as APM gas, at 10% of the cost of crude oil imported into India. The group presented its recommendation to the oil ministry last week.

However, this rate would be constrained by a cap price of $6.5 per million BTU until a complete price deregulation will be adopted in 2027. In order to pay production costs and maintain costs for CNG, fertilizer, and power, all of which require gas as an input raw material, at reasonable levels, there would also be a floor of $4.

In December, the average price of the crude oil that India buys was roughly $83 per barrel. According to the committee’s suggestion, the cost of APM gas, which accounts for 60% of all the gas generated in the nation, should be $8.3 per mmBtu (10% of imported oil price). However, if the Cabinet led by the Prime Minister accepts the committee’s recommendation for a ceiling and cap price, Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) will only receive $6.5.

APM gas is now priced at $8.57 per mmBtu based on a methodology that takes weighted average gas prices in countries like the US, Canada, and Russia, which all have gas surpluses.

The group recommended continuing with the current formula without a floor for gas produced from fields in challenging geology, such as deep sea or high-temperature, high-pressure (HTHP) zones. These fields presently receive a ceiling price of $12.46 per mmBtu using a different methodology than APM.

APM gas’s price was less than $3 until March of this year, but it surged the following month as the cost of energy increased around the world as a result of Russia’s invasion of Ukraine.

The price of CNG and piped cooking gas increased by 70% as a result, and a committee was established to provide “fair prices to end consumers” and “market-oriented, transparent, and trustworthy pricing regimes for India’s long-term ambition for securing a gas-based economy.”

According to the committee, every dollar fall in gas prices will result in a reduction in annual costs of Rs2,115 crore for CNG and PNG, Rs1,915 crore for electricity production, and Rs1,014 crore for fertilizer sector subsidies. Additionally, it would result in a loss of Rs2,500 crore in revenue for the government in the form of taxes, royalties, and dividends.

India wants to transition to a gas-based economy, with a target of increasing the proportion of natural gas in its primary energy mix from the current level of roughly 6.3% to 15% by 2030.

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