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Natural Gas Pricing in India, 2014: Is the Hike Justified?*

CASE STUDY, MANAGERIAL ECONOMICS
ET Cases - GSMC, 10 Pages

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Natural Gas Pricing in India, 2014: Is the Hike Justified?

 

On June 27, 2013, the Cabinet Committee on Economic Affairs (CCEA), Government of India, decided to implement the pricing formula suggested by the Report of the Committee on the Production Sharing Contract Mechanism in Petroleum Industry (2012) headed by Dr. C. Rangarajan (Rangarajan Committee), Chief Economic Advisor to the Prime Minister of India. The gas pricing decision was notified by the government in January 2014. The new pricing regime was applicable from April 2014 for five years. As per this decision, the gas price would nearly double from $4.2 per mmbtu1 though estimates vary. Barclays Equity Research estimated the price at $8.3mmbtu in 2014-15 and expected it to rise to $9.1 in 2015-16 and $9.4 in 2016-17.2 The revised price is expected to generate additional $500 million in revenue to the  government via royalty and taxes.3 Oil and Gas Companies (OGCs) have been demanding a rise in gas price which is regulated by the Government.

Not everyone was convinced about the need to raise gas prices so steeply and there were strong reactions including a Public Interest Litigation (PIL) against the government’s decision. Several questions arose in this context. Should the gas prices be regulated? Should the gas prices have been raised, that too so steeply? What is the basis of the increase? What is the impact of such an increase on various stakeholders? Will the government be forced to roll-back the price hike?

 



1 One mmbtu = 25.2 Standard m3 of natural gas measured at 1 atmospheric pressure and 15.56 degree Centigrade.
2 The Indian Express, January 11th 2014, http://indianexpress.com/article/business/business-others/govt-notifies-new-gas-pricing-formula/(accessed date: December 23rd 2015)
3 CNBC TV 18 moneycontorl.com, November 26th 2013, http://www.moneycontrol.com/news/economy/no-going-backgas-price-hikesnotification-soon-moily_997293.html?utm_source=ref_article (accessed date: December 23rd 2015)

Teaching Note Preview

Natural Gas Pricing in India, 2014: Is the Hike Justified?

 

Synopsis

This case describes the decision of the Indian Government to hike natural gas price in 2014. The natural gas production was controlled by State Owned Enterprises (SOEs) before India embarked on economic reforms in 1991 to engage the private sector in different industries which were otherwise reserved for SOEs. India is an energy deficient country and needed rapid increase in energy production to foster growth. This needed substantial investment in energy sector. Private investment in this sector would happen only if the government could ensure adequate return on investment. Main users of natural gas are companies engaged in power and fertilizers production. Prices of both these products are in turn regulated and considered to be politically and socially sensitive for the government to raise their prices. Leaving prices to the market may result in high prices for power and fertilizers. If the government does not want these prices to go up, it will have to provide for subsidy or share subsidy burden with the SOEs. The government was thus left with difficult task of balancing these two objectives of providing for adequate return to the natural gas producers and at the same time protecting the interest of consumers.

Case Positioning and Setting

This case may be used in MBA/M.Sc. level Microeconomics or Managerial economics courses under the topic on market structure and price regulation. It may also be used in course on Public Policy.

Pedagogical Objectives

  • • To understand the complexities of market structure of natural gas in India
  • • To understand pricing options for the government and its implications for various stake holders and to appreciate the reason why the Indian Government chose to regulate price rather than leave the price discovery to the market
  • • To discuss the arguments for and against the chosen pricing mechanism and the hike in gas price

 

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Abstract

This case study describes the decision of the Indian government to increase the price for natural gas in 2014. The Indian government wanted to attract private sector  investment into the sector. Attracting private investment required adequate return on investment which meant that gas price had to be closer to the market price. However, too high prices would affect the industries which are dependent on natural gas and in particular push up cost of power and fertilizers. In the backdrop of this dilemma,  the case study focusses on the market structure of gas in India, the need for price regulation, alternative pricing mechanisms and, arguments in favor of and against  price increase.



Pedagogical Objectives

  • To understand the complexities of market structure of natural gas in India
  • To understand pricing options for the government and its implications for various stake holders and to appreciate the reason why the Indian government chose to regulate price rather than leave the price discovery to the market
  • To discuss the arguments for and against the chosen pricing mechanism and the hike in gas price

Case Positioning and Setting

This case may be used in MBA/M.Sc. level Microeconomics or Managerial Economics courses under the topic on market structure and price regulation. It may also be used in a course on Public Policy.


* GSMC 2016, IIM Raipur

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