Four-member panel submits report on new gas pricing formula

A four-member committee of secretaries has submitted its report on a new gas pricing mechanism, prescribing a rate much lower than the doubling of price approved by previous United Progressive Alliance (UPA) government.

"The report was submitted yesterday," a top official said, adding that the report will be reviewed in the Oil Ministry before a note is moved to the Cabinet.

The government had, in August, constituted a committee comprising of secretaries of power, fertilizer and expenditure with additional secretary in the oil ministry as its member secretary, to make amends to a formula notified in January that doubled the gas price to US $8.4 per million British thermal units (Btu).

Though contents of the report have been kept under wraps, the official indicated that the price increase may be around 50 per cent. Most of the domestically produced gas is currently sold at a price of US $4.2 per million metric Btu.

The panel has tried to strike a balance between demands for a market linked rate by gas producers to make marginal and deepsea fields economically viable, and consumers in power and fertilizer sector, who have said they cannot afford any rate higher than US $5.

Though the government had stated that a gas price will be announced by September end, there are indications that a decision may be put-off until completion of assembly polls in Maharasthra and Haryana in mid-October.

Any increase, even of US $2 per mmBtu, will lead to a hike in CNG (Compressed Natural Gas) price for automobiles, something the ruling establishment does not want on the eve of state polls.

Industry sources said the previous UPA government had notified the Rangarajan formula in January but before a rate could be implemented from April 1, general elections were announced and Election Commission sought postponement of its implementation.

Since elections to Maharashtra and Haryana assembly have already been announced, a deferment can be sought on similar grounds.

An increase in gas price would have led to increase in cost of urea, power and CNG.

Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7 per cent of the nation's power generation capacity based on gas).

Also, there would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.

The increase in gas price would bring windfall for the government - about Rs 12,900 crore (US $2.08 billion) from additional profit petroleum, royalty and taxes accruing from doubling of gas rates, according to oil ministry estimates.

The Cabinet Committee on Economic Affairs (CCEA) had on June 25 deferred by three months the implementation of a formula approved by the previous UPA government which would have doubled gas price to US $8.4 per million Btu.

The Rangarajan formula, approved by the UPA government, was to be implemented from April 1 but was deferred as general elections were announced. The National Democratic Alliance (NDA) government on June 25 postponed its implementation by a further three months pending a comprehensive review.

Oil Minister Dharmendra Pradhan had last month told the Parliament that the NDA government decided to review the pricing formula keeping in mind public interest and recommendations of the Parliamentary Standing Committee.

Parliamentary Standing Committees on Finance as well as Petroleum had called for a review of the formula suggested by the Dr C Rangarajan headed panel, saying gas price should have some linkage with the cost of production.

According to the Oil Ministry, the cost of gas production varies between US $1.86 per mmBtu to US $4.31 per mmBtu but a cost-plus price would be perceived negatively by the market.

In their submission to the secretaries panel, energy producers have demanded a natural gas pricing policy that is "legitimate, relevant and credible" to maintain investor interest in Indian E&P sector.

State-owned ONGC in its submissions stated that it needs US $6-7.15 to break-even on gas it plans to produce from its most prolific KG basin block and a price of between US $5.25 to US $17.80 per mmBtu to break-even on production planned from seven small and marginal fields in the western offshore.

BP, which partners Reliance Industries in KG-D6 and other blocks, stated that deeper gas fields are not viable at a price of anything less than US $10.