The issue of gas pricing is in the public discourse after the Aam Aadmi Party questioned the logic of linking domestic prices to global rates. In the absence of a single global marker price, it is time India, and other large importing countries in Asia, develop a pricing mechanism that reflects regional realities. Akshay Mathur, Head of Research, Gateway House, explains:
The gas pricing issue between the government of India and Reliance Industries, brought into the public debate by Arvind Kejriwal, the former chief minister of Delhi, reveals how difficult it is to develop a fair pricing architecture for vital energy resources like gas.
At the heart of the issue is a long-known dilemma for policy makers: whether to link gas prices to an ‘assessed’ price, determined by our government or private Indian participants, or link it to an international market-based price.
India currently uses both methods. The Administered Pricing Mechanism (APM) price set by government for gas and used by the power and fertilizer sectors, is an example of the ‘assessed’ price, while the price that Indian companies pay for imported gas is an example of the market-linked price.
The other method is to link India’s natural gas prices to the international market, more specifically to the benchmarks of the U.S., UK, Japan, and those of countries such as Qatar and Australia. The US and UK benchmarks — the Henry Hub and National Balancing Point respectively — are determined by their local gas exchanges, whose prices include not just the cost of raw material, production, distribution and marketing, but also the sophisticated inputs from the financial markets such as volume, speculation, hedging, currency risks, geopolitical developments. The Japan benchmark -Japan Custom Cleared or JCC — is based on international crude prices. Our own gas import contracts such as those with Qatar and Australia are based on JCC.
These limitations with the international market-linked prices, coupled with our own inefficient domestic assessments now under scrutiny for corruption, makes price assessment in India sub-optimal at best.
Since then India has moved to an international market-linked pricing model for gas which is linked to average gas prices in the markets of the U.S., UK etc, for our private and public sector players. This was done based on the recommendations of a 2012 committee headed by C. Rangarajan, the Chairman of the Prime Minister’s Economic Advisory Council. The aim is to incentivise domestic exploration and pricing with even better transparency. This new pricing is to go into effect for all new contracts, starting April 2014.
It is imperative then, for India to find a solution that reflects our own business and market realities as also the consumer’s purchasing abilities. Now is the right time, with a new government due in Delhi in May, to design and implement a policy architecture that reflects our particular economic make-up.
India can take the lead in a regional initiative to develop a pricing architecture with other consuming nations, and thereby leverage our massive annual imports of oil and gas (Asia alone accounts for 70% of the world’s liquefied natural gas market). A small step has been taken. In September 2013, India and Japan — both heavily energy import-dependent — signed an agreement to work towards “rationalizing of LNG prices in Asia Pacific” and “towards the development of a market environment that would enable effective, stable and globally competitive LNG procurement” — a sort of Henry Hub benchmark appropriate for large consuming nations . It will encourage the development of a price assessment process based in rupees — a concept so far not comprehensively tested.
If successful, such an initiative can expand to include the other large importers such as Korea and China which are struggling with the same issues.
Akshay Mathur is Head of Research at Gateway House: Indian Council on Global Relations.
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