New gas pricing formula will cut prices by 9-11%

• Centre tinkers with expert committee recommendations

• Gas prices will not change for 2 years

• Thereafter, they will be increased by $0.25 per mmBtu annually

New Delhi: CNG and piped cooking gas prices will be cut by 9-11 per cent after the government revised the formula for pricing of natural gas, but there is no clarity on deregulation of the fuel, analysts said.

While the Union Cabinet accepted an expert committee report to price bulk of domestically produced natural gas at 10 per cent of month average import price of crude oil with a floor of $4 per million British thermal unit and a cap of $6.5, tinkering with the panel's suggestions will help the government avoid prices going up right in the middle of general elections next year. "City gas distributors could reduce prices of compressed natural gas (CNG), used by vehicles, and piped natural gas (PNG), used by homes, by 9-11 per cent, with the government accepting the key recommendations of the Kirit Parikh Committee," Crisil Ratings said. "Had the previous pricing regime continued, prices would have likely risen."

But the government has not acted on the panel's recommendation to fully deregulate prices in 2027. Asked about the deregulation of gas prices, Oil Secretary Pankaj Jain, briefing reporters late on Thursday evening, had stated that the decisions taken by the Cabinet have been comminuted.

"We don't know if the deregulation has been postponed or stalled for now," an industry official said. Also, the government tinkered with the recommendation of a $0.50 per mmBtu annual increase till full deregulation in 2027. The Cabinet decided that rates will not change for two years and will be increased by $0.25 annually thereafter.

This, analysts said, has helped the government avoid an increase in CNG and piped cooking gas (PNG) prices in April 2024 - when the country would have been in the midst of general elections. Fuel price hike would have become an election issue, an analyst said.

The Parikh committee had also recommended that gas should be brought under the Goods and Services Tax, or GST, regime. Having a common taxation such as GST for gas in lieu of state level VATs, which vary from 3 per cent to as high as 24 per cent, will help develop the market. But it is not known if the Cabinet accepted this recommendation. Crisil said the revised gas pricing norms would lend greater stability to gas prices for city gas distributors and sustained competitiveness with alternative fuels, thus driving demand and supporting massive capex plans. CNG and PNG prices had witnessed an 80 per cent jump since August 2021, on the back of a surge in international energy prices.

Till now, the price of gas produced from fields covered under the Administered Price Mechanism (APM) regime - which accounts for 70 per cent of domestic gas production - was determined semi-annually based on a formula that benchmarked it to average international prices at four gas trading hubs. APM gas is provided to city gas distributors for supply to CNG and residential PNG segments, which together account for 60 per cent of their sales volume. APM gas prices have seen wide fluctuations over the years, from a low of $1.79 per mmBtu in 2021, to a high of $8.57 for the 6-month period ending March 2023.

"Global gas prices have been even more volatile, exacerbated by the ongoing Russia-Ukraine conflict," Crisil said. As per the key recommendation of the committee accepted by the government, the APM formula is now revised and determined as a 10 per cent slope to crude oil prices, but with a floor and ceiling price of $4 per mmBtu and $6.5 respectively.