Date: 23/05/2023
Relevance: GS-3: Infrastructure: Energy, Ports, Roads
Key Phrases: Kirit Parikh committee, Administered Price Mechanism, piped Natural Gas, Compressed Natural Gas, competitive pricing, regasified LNG, Pricing for APM Gas.
Context:
- The Kirit Parikh committee on gas pricing reforms made several key recommendations that aimed to address pricing issues in the Indian energy sector.
Oil and Gas Sector in India:
- The oil and gas sector is among the eight core industries in India and plays a major role in influencing the decision-making for all the other important sections of the economy.
- India’s economic growth is closely related to its energy demand, therefore, the need for oil and gas is projected to increase, thereby making the sector quite conducive for investment.
- India retained its spot as the third-largest consumer of oil in the world as of 2022.
- The industry is expected to attract US$ 25 billion investment in exploration and production by 2022.
- India is already a refining hub with 23 refineries, and expansion is planned for tapping foreign investment in export-oriented infrastructure, including product pipelines and export terminals.
- India’s crude oil production in FY22 stood at 29.7 MMT.
- According to the IEA (India Energy Outlook 2021), primary energy demand is expected to nearly double to 1,123 million tonnes of oil equivalent, as India's gross domestic product (GDP) is expected to increase to US$ 8.6 trillion by 2040.
- As of September 2021, India’s oil refining capacity stood at 248.9 MMTPA, making it the second-largest refiner in Asia.
- Private companies owned about 35% of the total refining capacity.
Key Recommendations of the Committee:
- These recommendations hold significant implications for the country's energy landscape.
- Pricing for APM Gas:
- The committee suggested implementing a floor and ceiling price range for APM (Administered Price Mechanism) gas, which is produced by public sector companies such as ONGC and OIL.
- The floor price, set at $4/MMBTU, ensures that the gas price covers the marginal cost of production for these companies.
- On the other hand, the ceiling price of $6.5/MMBTU is fixed below the cost of imported regasified LNG.
- The floor price ensures that the gas price covers at least the marginal cost of production, while the ceiling price is set below the cost of regasified imported LNG.
- This pricing mechanism provides stability and ensures a fair return for the producers while protecting consumers from excessively high prices.
- Pricing Regimes for Other Fields:
- The committee suggested that gas producers from fields allocated through competitive bidding should have the freedom to set prices within a ceiling price, which would be revised every six months.
- This recommendation promotes market competition and allows for efficient pricing based on market dynamics.
- Removing the limit on pricing from January 2026 would further enhance market flexibility.
- Linking APM Gas Price to Crude Oil Price:
- The committee proposed linking the price of APM gas to the average cost of imported Indian crude oil in the previous month.
- This linkage helps align the gas price with alternative fuels like LPG and diesel, making it economically attractive for consumers.
- It also ensures that gas prices remain competitive and responsive to global energy market fluctuations.
- Incentives for Domestic Production:
- To boost domestic gas production, the committee recommended removing the ceiling price and granting complete pricing and marketing freedom by January 2027.
- This step would create incentives for investments in exploration and production (E&P) activities.
- Additionally, providing a 20% price premium to producers like ONGC and OIL for increasing production from their non-APM fields encourages increased domestic production.
Note:
- MMBtu is acronym for Metric Million British Thermal Unit, and it is a unit traditionally used to measure heat content or energy value. It is widely associated with measurement of natural gas in the energy terms globally.
Significance in the Context of India's Energy Sector:
- Improved Pricing Mechanism:
- The recommendations provide a structured and transparent pricing framework that balances the interests of producers, consumers, and the government.
- This fosters a fair and efficient market for natural gas in India's energy sector.
- Promoting Domestic Production:
- By incentivizing investments in E&P activities and providing pricing flexibility, the recommendations aim to increase domestic gas production.
- This reduces reliance on costly gas imports and enhances energy security.
- Consumer Benefit:
- The recommendations address the affordability of gas by ensuring that prices are linked to alternative fuels, protecting consumers from excessive price fluctuations, and promoting competition among producers.
- Sectoral Growth:
- With an increasing share of natural gas in India's energy mix, the recommendations align with the government's target of raising the gas share to 15% by 2030.
- Encouraging the use of gas in sectors like power, household (PNG), and transport (CNG) contributes to overall sectoral growth and cleaner energy transitions.
Some of the major initiatives taken by the Government of India to promote the oil and gas sector are:
- On May 21, 2022, the Government announced a reduction in excise duty of Rs. 8 (US$ 0.10) per litre on petrol and Rs. 6 (US$ 0.077) per litre on diesel.
- In May 2022, the government approved changes in the Biofuel Policy to bring forward the target for 20% ethanol blending with petroleum to 2025-26 from 2030.
- In the Union Budget 2022-23, the customs duty on certain critical chemicals such as methanol, acetic acid and heavy feed stocks for petroleum refining were reduced.
- In November 2021, India announced that it will release 5 million barrels of crude oil from its strategic petroleum reserves in a concerted effort to bring down global crude oil prices. This is roughly equivalent to a day’s consumption in the country.
- In September 2021, India and the US agreed to expand their energy collaboration by focusing on emerging fuels. This was followed by a ministerial conference of the US-India Strategic Clean Energy Partnership (SCEP).
- In July 2021, the Department for Promotion of Industry and Internal Trade (DPIIT) approved an order allowing 100% foreign direct investments (FDIs) under automatic route for oil and gas PSUs.
Conclusion:
- The recommendations of the Kirit Parikh committee on gas pricing reforms address the pricing challenges in the Indian energy sector.
- The floor and ceiling prices for APM gas, along with the pricing formula and market-based pricing for other fields, contribute to the stability, competitiveness, and sustainability of the gas market.
- These reforms support domestic gas production, encourage the use of cleaner fuels, and facilitate the government's energy targets, making them significant in shaping India's energy landscape.
Source: The Hindu BL
Mains Question:
Q. Discuss the main recommendations of the Kirit Parikh committee on gas pricing reforms and their significance in the context of India's energy sector. (250 Words).
