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Explained: Govt’s proposal for a unified gas price system

Written by Karunjit Singh
, Edited by Explained Desk |

Updated: July 12, 2020 2:01:24 pm

Explained: Govt’s proposal for a unified gas price system Oil and Natural Gas Corporation (ONGC) factory in Navi Mumbai’s Uran. Express Photo by Narendra Vaskar. 03.09.2019. Mumbai.

The government is aiming to cut down the cost of transportation of natural gas by setting a fixed tariff for the transportation of natural gas for longer distances to boost gas consumption.

Union Minister for Petroleum and Natural Gas, Dharmendra Pradhan has said that the government is planning to rationalise tariffs for the transportation of natural gas to boost its consumption in the country. The Petroleum and Natural Gas Regulatory Board (PNGRB) has also published a discussion paper on moving from a system where buyers of gas are charged for every pipeline they use in the system to a single charge across a pipeline network. The proposal, the government says, is part of a larger effort by it to boost the share of natural gas in India’s energy basket from around 6 per cent currently to 25 per cent by 2030.

How are tariffs decided currently?

Currently, tariffs for transportation of gas are set by the PNGRB separately for each pipeline based on the assumptions of volume of gas transported on the pipeline and its operating life aimed at providing the operator a pre-tax return of 18%. Tariffs for pipeline usage are divided into zones of 300km, with the tariff increasing for zones further away from the point where gas is injected. Further, if a buyer needs multiple pipelines even from the same operator, that transport tariff would increase. These tariffs increase the cost for buyers of gas further away from the point of injection of natural gas. All of India’s imported natural gas arrives at terminals on the west coast leading to costs for buyers increasing, the further east they are located.

“A consumer in Bihar or West Bengal has to use 2-3 pipelines of GAIL to get natural gas from Hazira and the tariff becomes additive,” said Vivekananda Subbaraman, analyst at Ambit Capital.

An expert noted that transport cost accounts or as much as 10% of the final cost of gas to an industry currently because of low international prices but usually accounts for around 2-3% of the price of natural gas. The expert also noted that this cost would increase significantly for buyers of gas in far flung areas of the country because of the current gas transport tariffs.

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What is the proposed move?

The government is aiming to cut down the cost of transportation of natural gas by setting a fixed tariff for longer distances to boost consumption. The government is proposing a unified price system with one price for those transporting gas nearby within 300 km and one price for those transporting gas beyond 300km. The move would fix tariff prices within an integrated pipeline network such as that of GAIL, which has India’s largest gas transportation pipeline network in the country preventing buyers from having to pay charges for the use of multiple pipelines.

“Such a move would help connect new markets and would benefit consumers in parts of the country far from the western coast,” said Subbaraman.

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Who then pays?

The cost of gas transportation for oil marketing companies such as Indian Oil corporation and fertiliser plants that are closer to the points of gas injection may go up if the government lowers rates for transportation of gas to areas farther away from points of supply.

GAIL would hope that the average tariff per unit of gas transported will not be very different from current tariffs, and experts say that the company would hope for increased utilisation as demand for gas increases.

GAIL had also proposed a system with a unified tariff to boost gas consumption.

The government is also expecting that as India boosts gas imports, it will be able to negotiate better prices on gas imports, Subbaraman noted.

“We are sub-scale importers, as we have a lot of latent demand which is not getting unlocked. We may get better rates on imported gas if we become larger importers”, he said.

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Explained: Govt’s proposal for a unified gas price system
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Explained: Govt’s proposal for a unified gas price system