The power and fertiliser sectors may have room to feel miffed on the pricing of natural gas from Reliance Industries Ltd’s (RIL) Krishna Godavari basin.
$4.2 becomes the floor, not the ceiling price
NEW DELHI: The power and fertiliser sectors may have room to feel miffed on the pricing of natural gas from Reliance Industries Ltd’s (RIL) Krishna Godavari basin, according to sources.
Petroleum secretary M S Srinivasan told CNBC TV18 on Friday that the fertiliser subsidy would come down by Rs 3,000-4,000 crore per annum after the decision.
But going by the calculations submitted by his own colleagues in the fertiliser ministry, that doesn’t seem to be the case.
A direct impact of he deal is increase in the cost of power and fertiliser. And to that extent, a continued subsidy burden on the government since consumers are not charged the real price of either power or fertiliser.
Interestingly, sources said Wednesday’s meeting of the empowered group of ministers decided that the value of ‘C’ — which is the premium over the producer price — would be considered zero only in the case of RIL.
For retaining the biddable character of the formula and for allocation of gas among priority sectors (power and fertilisers) the formula must retain ‘C’ as a positive, non-zero integer.
“This implies that in case of other producers, the gas price could be higher,” said an official.
As reported by DNA Money on August 29, the government approved price would set the floor for the purpose of calculation of government share in the profit.
Under Clause 21.6.2 of the gas production sharing contract that RIL signed with the government, the quantities sold to others would be on the basis of competitive arm’s length basis. This gives RIL room to negotiate a higher price from willing buyers, said sources.
Rahul Singh and Saurabh Handa, Citigroup analysts, in a report on Thursday said $4.2 is “not a sacrosanct figure for all future gas contracts to adhere to and it will definitely act as a floor”.
They said if gas realisation is below this, RIL will have to forego its profit share to compensate the government for the difference between gas price and the notional price of $4.2.
If the actual prices are higher, then the government share will be calculated at the higher price.
In the case of power sector, a senior NTPC executive said the thumb rule for gas-based plants is a capital cost translating to a fixed portion of Re 1 a unit in the power tariff.
Every dollar per million British thermal unit (mBtu) price of natural gas translates to a variable tariff of 32-33 paise a unit.
As per the government’s laid-down policy, the variable portion is a pass-through to consumers. A $4.2 gas price when delivered to power plants in Gujarat, it translates to about $5.8 and that works out to Re 1.85-1.91 variable (fuel cost) portion in the power tariff.
This increases the total base price of power to Rs 2.85 to 2.91, more than double of what has come out of the bidding for coal-based Sasan ultra mega power project.
The two primary opponents to RIL formula, NTPC and Anil Ambani-controlled Reliance Natural Resources Ltd, have been left out of the impact with the government stating the decision taken by EGOM will not prejudice the court cases being fought by them.
When asked whether the setting of benchmark price of $4.2 (base) would still influence the court decision, a senior NTPC Ltd executive replied in negative. However, industry analysts feel otherwise.
“Evolution of the benchmark price in the meanwhile will have an impact on their pricing, more so for RNRL, than for NTPC,” said Citigroup’s Singh and Handa.
The two companies were committed a wellhead (base) price of $2.24 and a delivered price of $3.18.
“A benchmark will influence RNRL’s pricing to a large extent, even if they get the entire agreed volume (28 million standard cubic metres a day),” added the report.
While committing supply to RNRL, RIL did not follow any bidding process. Besides, the government has already termed the proposed price to RNRL as not being at an “arm’s length relationship”.
As one RIL executive commented after the government decision, the formula would need to be strictly adhered in cases where “arm’s length relationship” has not been followed.
This would also include gas sales to RIL’s own outfits like its power plants in special economic zones or its petrochemical units.
In the case of fertiliser, which had said that only $5 mBtu delivered price is acceptable, $4.2 is not a welcome outcome of the whole debate.
“Fertiliser industry is disappointed because formula approved is no different from the asking price. It is not a market price but is only a monopolistic price,” said Dr S Nand, director (technical), Fertiliser Association of India.
Another fertiliser industry executive pointed out that the delivered price worked out to be $6.5. “It would disturb the economics especially of the new fertiliser capacity being planned in the country,” he said.
The ministry of fertilisers had pointed out that a change from naphtha to gas for fertiliser production would reduce the subsidy burden by Rs 3,300 crore from projected Rs 17,000 crore for 2006-07.
But it also added that at the end of Eleventh Plan, every dollar increase in gas price would correspond to an increase of Rs 3,000 crore in the subsidy bill based on the projected production of 30 million tonne.
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