There is a need to increase the domestic production of gas, says Kirit Parikh: Full Interview Transcript

Parikh: What we have suggested is that there should be floor of $4 per MMBtu. This is to cover the marginal cost of production of OIL and ONGC. We have also put a ceiling price of $6.5 per MMBtu, which will be gradually raised every year by about $0.5 per MMBtu. We also at the same time suggested that by January 1, 2027, this price caps and floor will be removed and that this will be in a completely free market determined price.

A: Yes, for the APM gas.

Parikh: Currently the difficult fields and many others with different kinds of contract terms and conditions are such that they have by and large pricing freedom. But that freedom is constrained by an upper bound that the government prescribes and updates from time to time. We have suggested that this upper bound should continue to remain for the next three years and it should be removed from January 1, 2026.

The whole idea for doing all this is that we wanted to make sure that the government target of 15 percent of gas in the Indian economy 2030 has a chance of fulfilment. That requires that we increase the production and produce a lot of domestic gas. Currently only 6 percent of the total energy is from gas and we are importing almost 50 percent of the gas. So, if you want to raise gas' share, it is obvious that you must increase domestic production.

Domestic production requires that producers get total marketing and pricing freedom. All the fields which have been allocated after February 2019 have that freedom and we are extending that from January 1, 2026 for other fields.

A: We have only given the floor and the ceiling. We have said that you take the import price of crude oil, apply some factor to it and determine and describe an APM price. This APM price, whatever it is the ceiling and floor will be applied. So, if the APM price works out to $8 then you will charge only $6.5 and this is the price at which ONGC and OIL will sell to GAIL and to consumers or distributors like CGD network.

Now, the second objective apart from saying 15 percent share of goal was indeed to have a reasonable price or fair price for the consumers. The consumers really need to be protected. Those getting implicitly subsidized gas are PNG consumers household, piped natural gas and compressed natural gas consumer for transport sector. Of course, fertilizer plants have always been supported for a long time. The way we have suggested I think will provide adequate returns to CGD companies to make sure that the PNG consumers get a price which is competitive and advantageous compared to its domestic consumers, alternative fuel namely LNG. And similarly, for CNG users that should be competitive with respect to diesel.

Parikh: That is for APM.

Parikh: That is for difficult gas fields.

A: I think the new gas fields have no linkage with anything. They are free to do anything, but the market would provide the necessary linkage. It is expected that the gas prices in the international market will come down dramatically in two years time because some 25 percent addition to capacity for exporting LNG is coming up and in 2027, another 20 percent is coming up. So, there will be significant increase in the supply. So, I think once that import price comes down, then it is automatically going to provide linkage to the domestic producers. They cannot sell at a price which is different from that.

A: The main roadmap for that is free the prices, give the producers the E&P, the exploration and production companies total freedom for marketing and pricing. That is the one step we are suggesting, I think that is perhaps the best roadmap that you can think of.

A: Yes, of course, that is there, the ministry itself will decide and then take it to the cabinet.

On global volatility, price volatility for LNG will continue for some time, but we don't expect it to last too long. Of course, if the volatility continues the government should decide whether we should do this or that. That is why we have given three years and four years timeframe, that only on January 1, 2026 means three years from now and January 1, 2027 means four years from now. So that's the reason, for absorbing the volatility, as well as the legacy of many contracts people have made.

A: We have nearly listened to all stakeholders, we have considered their concerns and we have tried to balance them in the sense that look, you have to give all producers adequate return, distributors adequate margin and consumers fair price and we didn't want to increase any burden on the government finances.

Now, increasing APM gas price, for example, currently, it is $8.5, it will come down so that should certainly help the CGD distributors. But compared to past when it was only $1.69 per MMBtu with the price of APM gas, the government was losing money. It was passing the burden of giving cheap gas on ONGC. But in the process, the government is losing revenue on their share in dividend, their taxes that they might get from profit making public sector companies and the royalty. So all these together, they were losing. Now with even a floor of $4, they will get a positive addition to the central government's budget.

A: The thing is, this is the hardest problem in some sense to solve and we have not really solved it in some sense, not given a formula for doing this. The reality is that city gas wants a certain amount of gas, fertilizer wants certain amount of gas and so on. So there are different consumer groups who want this gas and they all want to put a claim on the APM gas because it is cheaper than the other gas in the market. Therefore, I think we have just said the government should revise the allocation thing and gradually get out of this whole business of allocation. Because earlier they had done this allocation, they decided to go out of the crude oil allocation business and in the same way they should get out from the allocation business.

A: These users, city gases and fertilizer are certainly the priority users. Because fertilizer price whatever the government decides they are compensating the manufacturing companies fully for the cost of production.