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On April 7, 2023, the Government of India (“GoI”) has issued a notification (“Notification”) amending the Domestic Natural Gas Pricing Guidelines, 2014 (“2014 Gas Pricing Guidelines”). Pursuant to the Notification, the price for domestic gas (produced from blocks covered under the 2014 Gas Pricing Guidelines) will now be determined basis the Indian crude basket price rather than being based on international benchmarks.

Background

The pricing regime for domestic natural gas has evolved over the years with India aiming to progressively move from regulated pricing to pricing freedom. Prior to 2014, natural gas sold from different blocks was to be sold at different prices depending on the regime in which such block was allocated/awarded. For instance:

• For blocks allocated under the nomination regime to National Oil Companies (until late 1970s), natural gas was to be sold at a price determined/fixed by the GoIe., Administered Pricing Mechanism (“APM”);
• Subsequently, natural gas produced from certain new fields of existing nominated blocks was permitted to be sold at non-APM prices provided that the price for such gas was as per the GoI provided pricing schedule based on supply zones;
• For blocks allocated under the pre-NELP regime (blocks awarded between 1980-1995) and which were governed by the production sharing contracts (“PSC”), the price formula was specified in the PSC or was to be approved by the GoI; and
• For blocks awarded under the New Exploration and Licensing Policy (“NELP”) regime (awarded between 1997 to 2010), price of gas was to be based on a formula/ price basis approved by the GoI.

To bring some uniformity in gas pricing, the GoI notified the 2014 Gas Pricing Guidelines. The 2014 Gas Pricing Guidelines provided a price determination formula which was based on international benchmarks[1] for determining the well head price of natural gas. The price so determined was notified every 6 (six) months by the Petroleum Planning and Analysis Cell (“PPAC”) and was applicable to all gas produced in India (including gas produced from nomination blocks, NELP blocks, Pre-NELP blocks where the PSCs provides for approval of gas prices by the GoI with only a few noted exceptions (such as gas produced from blocks where (a) gas prices have been fixed contractually for a certain period of time, till the end of such period; (b) the PSC concerned provides for a specific formula for natural gas price indexation/fixation; and (c) pre-NELPPSCs which do not provide for GoI approval of formula/basis for gas prices).

Thereafter, between 2016 and 2023, in an attempt to move towards pricing freedom, several notifications were issued which are applicable for gas produced from certain types of fields and such blocks/fields have been carved out of the applicability of the 2014 Gas Pricing Guidelines. Therefore, as on date, gas produced from the following fields enjoys pricing freedom:

• For existing discoveries in deepwater, ultra-deep water and high temperature-high pressure areas which were yet to commence production as on January 1, 2016 and to future discoveries in such areas, pricing freedom subject to a ceiling price[2];
• All hydrocarbons discovered and produced from the blocks awarded under the Hydrocarbon Exploration and Licensing Policy (“HELP”), introduced in 2016;
• Gas produced from coal bed methane blocks;
• Existing discoveries which were yet to commence commercial production as on July 1, 2018 and to future discoveries from fields located in the northern eastern region of India;
• New discoveries under existing contracts, in which the field development plan would be approved after February 28, 2019 (except for nomination fields where it would be permitted subject to the approval of the Directorate General of Hydrocarbons).

Notification

As a step to protect natural gas pricing from adverse market fluctuations in the international gas markets, the Notification has been issued to revise the 2014 Gas Pricing Guidelines and the price of gas has been linked to Indian Crude Basket. As per the Notification, following amendments to the 2014 Gas Pricing Guidelines have been brought in:

• the natural gas price under the 2014 Gas Pricing Guidelines will be 10% of the Indian Crude Basket Price (as defined by PPAC from time to time). Such prices would be declared by PPAC on a monthly basis.
• For the gas produced from nomination fields, the price shall be subject to a floor ($4 (US Dollar four)/MMBTU) and a ceiling ($6.5 (US Dollar six point five)/MMBTU) whereby the ceiling would increase by $0.25(US Dollar zero point twenty five)/MMBTU each year after 2 (two) financial years (FY 2023-24 and FY 2024-25).
• Gas produced specifically from new wells or well intervention in the nomination fields would be allowed 20% premium and such gas would be subject to Government’s policy related to commercial utilization of natural gas.
• Subject to provisions of the production sharing contracts, the price so declared by PPAC would also be applicable where the contracts of NELP or Pre-NELP blocks provide for government’s approval of prices. The floor and ceiling price which are applicable to the nomination blocks will not apply to these fields.
• PPAC will notify the prices under the 2014 Gas Pricing Guidelines (as amended by the Notification) valid from April 1, 2023 till the date of issue of this notification as well the prices under the revised notification for the remaining period of April 2023 i.e. day after the day of notification to the end of the month. For subsequent months, the prices will be applicable from the 1^st day of the month.

JSA Comment

Prior to the amendments to the 2014 Gas Pricing Guidelines, domestic gas price was linked to international gas trading hubs and international market fluctuations directly impacted such price. Given the recent volatility in the international markets, revisions to the 2014 Gas Pricing Guidelines are a welcome step. Further, the linkage of natural gas pricing to crude is also aligned to the prevalent industry practices. The Notification is a step towards pricing freedom and deregulation, and hopefully, this will spur investments in this sector.

Additionally, it is interesting to note that on one hand, the revisions to the gas pricing formula are likely to reduce gas price for piped natural gas (“PNG”) and compressed natural gas (“CNG”), thereby increasing margins for city gas distribution (“CGD”) networks entities and potentially reducing the price for customers, on the other hand, such gas pricing may be viewed as more restrictive for national oil companies, viz ONGC and OIL (being subject to a ceiling price). Also, while the price at which PNG and CNG are sold to retail customers is determined by entities operating CGD network and such entities have the freedom to determine such price vis-à-vis the retail customers, it is expected that the price reduction benefit will be passed-on to the retail customers.

This Prism has been prepared by:

Venkatesh Raman Prasad Partner

Shivani Chugh Partner

Sweta Singh Senior Associate

For more details, please contact [email protected]

[1] The International benchmarks were Henry Hub, National Balancing Point, Alberta Hub and Russia

[2] The MoPNG notified the ‘Marketing including Pricing Freedom for the Gas to be produced from Discoveries in Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas Guidelines’. Ceiling price is notified by PPAC on a 6 (six) monthly basis.