The Indian cabinet has approved a policy aimed at creating price discovery for domestic natural gas output, part of a series of reforms by Delhi to push the country towards becoming a gas-based economy.

The government will put in place guidelines for gas producers to offer their output through an electronic bidding process in which their affiliate firms can participate, without providing details of the process or platform for the gas sales.

It hopes that that a transparent market-based price discovery process for domestic gas will reduce the reliance on LNG imports and increase competition in the marketing of gas. A standardised bidding procedure is also expected to contribute towards the ease of doing business and encourage investment in domestic gas production.

Domestic gas prices are fixed by the government every six months and are based on a formula designed to encourage exploration and development of reserves in difficult areas. The prices are based on weighted-average prices at the US' Henry Hub, the UK's NBP, rates in Alberta and Canadian and Russian prices, with a lag of one quarter.

The government-set domestic gas prices do not affect prices of imported LNG, which are market based. Imported LNG accounts for at least 50pc of India's gas requirements.

Domestic gas output accounted for 1.85bn m³, or around 40pc, of the gas available for sale in August, down from 2.1bn m³ a year earlier. LNG imports, in comparison, accounted for 2.9bn m³ in August, up from 2.8bn m³ in August 2019, according to oil ministry data. India's net production of gas was 30.3bn m³ of gas during the 2019-20 fiscal year that ended 31 March, down from 32.1bn m³ the previous fiscal year.