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Government defers gas price hike for three months

Thursday, 26 June 2014 - 6:15am IST | Place: New DelhiMumbai | Agency: dna

Will review Rangarajan formula; wants to involve all stakeholders

The NDA government does not seem to be in favour of a steep hike in the gas price as suggested by the Congress-led UPA government.

The cabinet committee on economic affairs (CCEA) on Wednesday deferred the gas price hike by three months. The move will provide interim relief to the consumers as there will be no hike in price of CNG, piped natural gas and power. A thorough review of the gas prices, meanwhile, is on the cards.

Immediately after the CCEA decision on gas pricing, finance minister Arun Jaitley indicated that the government in the next three months will review the pricing. "Mechanism for gas prices need to be reviewed," said Jaitley.

Oil minister Dharmendra Pradhan said the cabinet had decided to hold further consultation with all the stake holders. The UPA government had committed to implement recommendations of the Rangarajan committee that would have nearly doubled the gas price from the existing $4.2 per unit (million metric British thermal unit or mmbtu). Ministry officials said Jaitley and oil minister Dharmendra Pradhan, along with top officials, discussed the issue with the prime minister on Sunday and Monday.

However, it seems the government is in no mood to take a decision in a jiffy. Last year, when BJP was in opposition the Yashwant Sinha committee on finance had suggested that the gas prices not be decided in a hurry and rather be discovered after the complete auditing. The committee had called for a thorough analysis of cost of exploration before deciding on the final price.

In January, the UPA government notified that gas prices will be revised based on the Rangarajan formula, and effective from April 1, 2014. The previous government, however, postponed the price hike decision in April pending elections. Post that Reliance Industries (RIL), along with its partners Niko Resources and BP, had issued an arbitration notice to the government seeking implementation of gas pricing guidelines announced in January.

The government also clarified that there is no proposal from the petroleum ministry's for any hike in LPG or kerosene prices. These means oil marketing companies would continue to face higher under recoveries in case of these two fuels.

In another development, RIL has been once again slapped with additional penalty of $579 million for natural gas production shortfall from KG-D6 block for the financial year 2013-14. The penalty in the form of disallowing costs incurred on the field is for missing the target in 2013-14, reported PTI, quoting an unnamed government official. With this, the total costs disallowed will increase to $2.375 billion.

"It is very clear that this government is not going to give $8.4/mmbtu price in any circumstances. It must be remembered that Rangarajan formula was arithmetic rather than being scientific. I think it is a right move from the government, as they want to involve all stakeholders," SP Tulsian, an independent expert tracking the oil and gas sector, said.

The deferment of gas price decision will definitely impact upstream companies' shares negatively. Tulsian expects shares of ONGC to fall to Rs 410 from Rs 436 on Wednesday and Reliance Industries to Rs 999 from Rs 1050 in Thursday's trading session.

"Investors were expecting a firm decision from the government, so definitely it will impact the sentiment as well as delay further investment in the sector. However, the government will try to mitigate the impact of price hike on affected sectors like power, fertiliser and city gas distribution in these three months," said Debashish Mishra, senior director, Deloittee India. He expects that the government may use additional revenues of state-owned companies like ONGC for mitigating increased subsidy burden following price gas price hike.

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