Rangarajan panel's gas pricing formula might prove too complex

The Rangarajan committee has recommended a new mechanism for pricing domestic natural gas linked to an index of international prices, which seems unexceptionable in principle and an improvement on the currently approved rigid administered rate that does not appear to adequately determine scarcity value. However, it may prove difficult to work out at least two of the four series of international prices suggested as benchmarks, and it is a moot point whether the average price so determined can be considered efficient for usage and supply here. Unlike other traded commodity markets, internationally gas prices are of course characterised by disparate regional benchmarks. The panel wants the price formula reviewed in five years assuming that the gas market, and attendant infrastructure like import terminals and pipelines, would be more developed then. But in the ensuing period, we surely need policy to induce transparent price discovery in gas and also develop promising clean-coal technologies like coal gasification and combined-cycle power plants, to effectively manage the explosive demand for gas, and in tandem address its relative short supply in our endowment of natural resources. The point is that proactive market design and regular scope for price bids for gas should lead to a better demand and supply scenario looking ahead.

To determine the domestic gas price, the panel wants the netback price (that reflects price received by the buyer for his final product) of Indian imports of liquefied natural gas (LNG) at the wellhead of exporting countries. It would form one set of prices. The other set of prices proposed is an average of the Henry Hub in the US and the National Balancing Point in the UK, plus netback prices of the sources of LNG supply for Japan. And the average of the two sets of prices is what’s proposed as the local price of gas. But while prices in the hubs of the mature markets — with very different supply and demand patterns than here — could be tracked, determining netback prices for LNG imported into India or Japan would be quite a task. Besides, gas via LNG imports remains quite small here and Japan is hugely energy-efficient.