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Gas Price hiked 62% by Central Government – Impact on inflation and household savings?

Gas Price hiked 62% by Central Government – Impact on inflation and household savings?

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  • GS 3 || Geography || Indian Economic Geography || Energy Resources

Why in news?

Government Raises Gas Prices by 62%, how it’ll impact?

Present Context:

  • The price of natural gas was hiked by 62%, a central government order.
  • Natural gas which is used to make fertilizers, produce electricity and is turned into CNG for automobiles will now be priced at USD 2.90 per metric million British thermal unit for the six month period beginning 1 October.
  • The new price represents a 62% increase from the April-September 2021 price of $1.79/mmBtu, which was the lowest since 2014.

Probable reasons for the hike:

  • The hike comes on the back of firming benchmark international prices but does not reflect the spurt in spot or current price of liquefied natural gas (LNG) witnessed during the last couple of weeks.
  • Natural gas prices affect the earnings of state-run producers such as Oil and Natural Gas Corp Ltd and Oil India Ltd.
  • This is the maximum price that Reliance Industries Ltd and its partner BP plc are entitled to for the gas they produce fromdeep-sea blocks such as KG-D6.

Impact on Consumers:

  • The increase in gas price is likely to result in a 10-11% rise in CNG and piped cooking gas rates in cities such as Delhi and Mumbai, industry.
  • It will also lead to a rise in the cost of generating electricity but consumers may not feel any major pinch as the share of power produced from gas is very low.
  • Similarly, the cost of producing fertilizer will also go up but as the government subsidizes the crop nutrient, an increase in rates is unlikely.

About Liquified Natural Gas

Liquified Natural Gas: LNG is produced by cooling NG to – 162 degree C in Cryogenic stage through Liquifaction. Kept in liquid form to increase quantities of NG that can be stored in tanks.

  • Advantages:
    • Easy to transport.
    • Helps in electrification.
    • Clean burning fuel, smoke free, less CO2 than Coal, no black carbon.

Gas-based economy:

  • Pricing and Affordability: Lower local gas output than expected, along with higher international LNG prices, has rendered gas-fired power generation uneconomical, as it cannot compete with coal-fired power generation at current domestic coal rates.
  • Field data quality and availability: Poor data quality continues to be a hurdle for policymakers and potential private sector initiatives in India.
  • Competition: The structure of the Indian gas market, with some aspects liberalized and others regulated by the government, has impeded competition and affected the entire gas supply chain, as has frequent government engagement in the form of multiple rules and regulations.
  • Gas Distribution Infrastructure: The northern and western areas have the most established pipeline networks. Gas transmission infrastructure and access are lacking in significant parts of the country.
  • Inadequate development on international gas pipelines: India has been exploring pipeline gas imports. Despite considerable debate about pipelines, no progress has been made on international pipes.
  • Reliance on Imports for Gas: India is the world’s fourth-largest LNG importer, with Qatar accounting for a major portion of that. India’s import dependency has grown as local energy output has fallen behind demand growth. As a result, India’s energy security has been a source of concern.
  • Gas Distribution Infrastructure: The pipeline networks in the north and west are the most well-established. In many sections of the country, gas transmission infrastructure and access are limited.
  • Inadequate international gas pipeline development: India has been looking at pipeline gas imports. Despite extensive debate on pipelines, no progress on international pipelines has been accomplished.
  • Gas Import Dependence: India is the world’s fourth-largest LNG importer, with Qatar accounting for a significant share of that. India’s reliance on imports has grown as domestic energy production has lagged behind demand growth. India’s energy security has been a source of concern as a result.

New Policy:

  • A draft city gas distribution policy was previously released by the Ministry of Petroleum and Natural Gas.
  • States may adopt it in order to expedite the implementation of city gas distribution (CGD) networks.
  • For gas-powered automobiles, reduced road taxes and value-added tax (VAT) may be granted. This will make doing business easier.

Pricing:

  • The government aims to guarantee that pricing is transparent and that transactions are simple.
  • Previously, the price of domestically produced natural gas was set by a formula that averaged out rates in gas surplus countries like Russia and the United States.
  • On October 15, 2020, the government adopted revisions that offer producers the freedom to discover the market price of gas through a standard e-bidding process.
  • The notification also gives them the liberty to market or sell the gas generated to anybody, including affiliates.

Conclusion:

On the back of continued healthy economic expansion, India’s energy demand is expected to expand faster than that of all major economies. As a result, India’s energy demand as a percentage of global energy demand is predicted to increase to 11% in 2040, up from around 6% in 2019. Natural gas consumption is expected to grow at a 4.31 percent compound annual growth rate (CAGR) to 143.08 million tonnes by 2040, up from around 56 million tonnes in 2019. As a result, India must take steps to get the oil and gas sector into order through regulatory support and incentives for private firms to establish R&D centers to address technical issues.

Mains oriented question:

The Indian oil and gas industry is beset by a slew of issues. Discuss. What has the Indian government done to address these concerns? (200 words)