KOLKATA (miningweekly.com) - India’s Finance Ministry has shot down a proposal for free pricing on natural gas on the grounds that the domestic market is not yet ready for such a regime.

The decision has effectively derailed the Oil and Natural Gas Ministry’s move to partially dismantle the current administered pricing system and permit oil and gas exploration and production (E&P) companies to adopt market determined prices based on demand and supply, a Ministry official said.

The Finance Ministry’s aversion to a market-determined regime has also put under a cloud plans for dual-pricing for output from ‘difficult and challenging oil and gas fields’ and made the latter more attractive for investing by E&P majors, the official said.

Rationalising its opposition to freeing the natural gas market, the Finance Ministry observed that the Indian natural gas market was still in a nascent stage and, as such, did not have enough players to ensure sufficient competition in the market and fewer players would risk distortions creeping into the price discovery mechanism.

It also pointed out that the Oil and Natural Gas Ministry had failed to clarify sufficiently how feedstock pricing could be left to market forces when several end products, including fertilizers and electricity, were under a government-administered price regime and in some cases offered government subsidies, the official said.

The Oil and Gas Ministry had proposed that specified quantities of production of E&P companies would be auctioned and the price discovered based on bids received by consuming industries. In the case of ‘difficult and challenging’ oil and gas blocks, the blocks would be categorised under five divisions based on the level of difficulty in exploration and production, and output ranging from 25% to 50% of output would be priced as per bids received from consumers.

However, as a concession to older oil and gas blocks, it said that a free pricing regime would only be applicable for all blocks discovered post March 2015.

According to government estimates, India would be able to produce about 47-million meters per day of natural gas from difficult and challenging blocks over the next five years. The country’s current natural gas production was pegged at around 90-million meters per day.

The government in September had announced a 15% reduction in gas prices effective October 1, 2015, at  $4.24 per million British thermal unit (mBtu) from $5.18 per mBtu, based on average global gas prices between July 2014 and June 2015.

It might be noted that the Cabinet Committee for Economic Affairs, the government’s apex decision-making body had recognized submissions from domestic and foreign E&P majors that it was becoming difficult for them to take up investments in new exploration and production projects in view of falling gas prices and the need for incentives specially for geologically challenging fields.