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Oil Ministry wants fresh formula for gas price

Friday, 4 July 2014 - 6:00am IST | Agency: dna

If proposal accepted, govt may deny RIL new gas price until KGD6 output fall met

The NDA government, which has kept gas price hike on abeyance, is likely to scrap the Rangarajan formula for determining domestic natural gas price, and go for a fresh method that will be more realistic.

The oil ministry has passed a note to the cabinet on July 1, demanding a fresh formula. "The government needs to rethink certain elements in the pricing formula suggested by the Rangarajan panel, which only serves to push the gas price higher than it ought to be. A more realistic price formulation better suited to our current priorities may be evolved," according to the note signed by petroleum secretary Saurabh Chandra on Tuesday.

The note, a copy of which is with dna, primarily discusses the previous report, 'Economic impact of revision of natural gas price', prepared by the Yashwant Sinha-led standing committee on finance.

The note strongly recommends a fresh pricing mechanism that is more balanced and holistic and closely related to the audited cost of production and that gives a reasonable return on the capital invested. It has called for better involvement of sectors like power, fertilisers and city gas distribution that can get directly get affected because of an increase in gas price.

The ministry note has recommended that Reliance Industries (RIL), the contractor for Krishna Godavari basin, should not be allowed new gas price until it is able to meet the shortfall in gas output over the last four years. "The government must ensure that the contractor responsible for delivering the major chunk of gas from the KG-D6 field supply delivers the shortfall that it still owes as per the agreement at the old price of $4.2/mmBtu, rather than getting the benefit of the new price for previous commitments," the note said.

If the cabinet accepts the recommendations, it could be a major blow for the Mukesh Ambani-owned company, which is already facing some litigation over the shortfall in KG D6 gas production.
RIL spokesperson Tushar Pania said, "Your questionnaire seems based on a flawed surmise. There is therefore no reason for us to dignify your questionnaire, based as it appears on rumours and hearsay. You may want to reconfirm with an original source or the government."

On June 23, the cabinet committee on economic affairs (CCEA) deferred the gas price hike by three months, and said it would have further consultation with all stakeholders. The UPA regime had notified in January that gas prices will be revised on the basis of Rangarajan formula. Its implementation would have doubled the prices from the current $4.2 per unit mmBtu (million metric British thermal unit).

As per back-of-the-envelope calculations, every dollar increase in gas price can lead to Rs 1,370 per tonne rise in urea production cost and 45 paise per unit increase in electricity tariff. There would be a minimum Rs 2.81 per kg increase in CNG price and Rs 1.89 per standard cubic metre hike in piped cooking gas. Considering a $4.2 increase, power cost would have gone up by over Rs 2 per unit and CNG rates jumping by over Rs 12.6 per kg. Besides, piped cooking gas price would have gone up by Rs 8.50.

The note by oil ministry also struck down the argument that higher gas price would bring additional investment in the oil and gas sector.

"Despite raising domestic well-head price by almost 300% during the period beginning 2005 till date (from as low as $1.75/mmBtu to $4.20/mmBtu), private investment in the sector and the country's gas output has actually dropped," the note says. It also strongly suggests state involvement in the process of deciding the price as they would have to significantly raise power tariffs to cover high cost. The oil ministry note also said that Indian market is not mature enough to allow free market pricing.

The Rangarajan formula had suggested uniform gas pricing at 'unbiased arms-length'. It also suggested first taking an average of the US, Europe and Japanese hub or market price and then averaging it out with the netback price of imported liquefied natural gas (LNG) to give the sale price of domestically-produced gas.

In December 2013, the UPA government had allowed hike in the price of natural gas from RIL-operated KG-D6 basin from April 2014 on a condition that the company would submit a bank guarantee, as decided by the ministry of petroleum.

According to initial estimates, KG-D6 output was to reach 80 mmscmd by April 2012. Production from D-1, D-3 fields in the block started in April 2009. After hitting a peak of 60-61 mmscmd in early 2010, the output started to drop. At present, the total output from D6 block that includes MA fields is around 14 mmscmd.

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