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Gas pricing issue to be sorted after Budget session; Reliance, ONGC and Cairn have longer wait

Monday, 11 August 2014 - 11:00am IST | Place: Mumbai | Agency: dna webdesk

The government will make up its mind on the gas pricing issue after the Budget session of the Parliament ends. Arun Jaitley needs to take a final call on the matter but the government cannot ignore the public interest litigation (PIL) on in the Supreme Court that was filed by Prashant Bhushan and Gurudas Dasgupta, the Business Standard reported.

The report says that the NDA government might also come up with a formula, but something that could be linked to the costs since coming up with an uniform price is not feasible and applicable to all.

The Indian governments, both in the UPA and in the NDA regime has been indecisive about fixing the price of domestically produced natural gas. The new government has deferred any rise in gas prices for the past three months, and now will review the entire structure of gas exploration and pricing in India. The government in India allocates exploration blocks to corporate players. The company explores and produces natural gas, and the government has a profit sharing contract in place with the private player to divide the share of the production.

The government, in the end of July had set up a committee under Suresh Prabhu who had been the architect of power reforms under the previous NDA regime under the prime ministership of Atal Bihari Vajpayee. This could mean that C Rangarajan's formula of gas pricing, arrived at during the UPA regime, could be no longer in use. This pricing policy could also involve Pratap Bhanu Mehta and Bibek Debroy as other members.

A deadline of August 31 has been set up to consult all the stakeholders and the government is likely to take a call by October.

Media reports suggest that the present government feels that some elements of Rangarajan's formula is not relevant to India and must be removed from pricing. Rangarajan had proposed that domestic gas should be priced by taking an average of LNG imports in India, the US and UK trading hub rates and LNG imports in Japan. This doubled the present prices to $8.4 per million British thermal unit (mmBtu).

However, PTI had reported that the oil ministry is not accepting the formula for three flaws. One, the formula has included Japan's import prices even though that country is not a producer. Second, it has "wrongly" assumed that prices at US hub and UK hub are equal to wellhead prices. Third, the formula gives equal weight to small Indian imports along with US and European trading volumes instead of calculating weighted averages. With these changes the price could come down to $6-6.5 per mmBtu.

The major players in the market that would face the impact of gas pricing is Reliance Industries, along with other players like Cairn and ONGC.

With every 1 dollar rise in prices, the government will earn approximately Rs 3000 crore due to its own PSU dealing in the sector. But since the cost of power and fertiliser would go up, it would face much larger losses. Fertiliser subsidy could go up much more than Rs 3000 crore, while power sector losses could go up by Rs 10,040 crore a year, Business Standard estimates.

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