Poll code may hit natural gas pricing formula

Gas pricing appears to have reached a dead end. On Monday when the Election Commission asked the oil and gas ministry to defer the implementation of the gas price hike, which was scheduled to take effect from April 1, until the code of conduct was in place, this raised doubts whether the pricing formula itself would be changed later.

The UPA government has said that the formula would help increase domestic gas production. Gas producers have echoed this view. But the main opposition party BJP has opposed it. The Standing Committee on Finance, headed by former finance minister and BJP leader Yashwant Sinha, had objected to the formula and said that it was not created in a transparent manner. BJP leaders have said that they will review this formula if they come to power. Communist leader Gurudas Dasgupta has challenged the pricing formula in the Supreme Court. The Election Commission cited this court case for deferring the price hike.

The decision will impact companies like Oil and Natural Gas Corporation, Oil India Ltd, Reliance Industries and Cairn India. Lobby group Confederation of Indian Industry opposed the poll panel's decision saying that the formula had already been approved by the Cabinet and only computation of the gas price was to be done.

Legal experts tell Business Today that gas pricing doesn't need Parliament's approval and only a Cabinet decision is required. So, it will depend on what the new government thinks about the formula. The oil ministry has sought a legal opinion on this. For the time being, gas has to be supplied at old rates of $4.2 per million metric British thermal units.

Gas pricing has become an election issue, especially after political leaders including J. Jayalalitha and Arvind Kejriwal started opposing it. Kejriwal, when he was Delhi Chief Minister, filed a police complaint against Union Petroleum Minister Veerappa Moily, former oil minister Murli Deora and Reliance Industries Chairman Mukesh Ambani for allegedly colluding to increase gas prices.

The formula was finalised on the basis of recommendations of a committee led by C. Rangarajan, head of the Prime Minister's Economic Advisory Council. According to the new method, the price of locally produced gas will be calculated on the basis of weighted averages of the price India pays to import liquefied natural gas and prices in the gas hubs of the US, UK and Japan. But the formula has attracted criticism.

Critics say the method factors in the Japan Crude Cocktail (JCC) price, which Tokyo uses to calculate the price of imported liquefied natural gas (LNG), twice because it is already linked to the price India pays to import LNG from Qatar. JCC-linked gas prices are the highest in the world and Japan itself is moving away from this.

Also, these import hubs calculate the price factoring the gross calorific value, whereas Indian contracts are linked to net calorific value. Gas is generally used to generate heat and heat is calculated in calorific values. There is a difference of about 10 per cent in these two factors, so the price for the end user will increase further. The fertiliser ministry has already taken up this issue with the oil ministry. The biggest argument against the formula is that, since this will determine the price of domestic gas, the local market should have been considered before determining the price.