Petroleum ministry seeks increase in price of domestic gas

There is every chance that the price of the domestic gas will be raised following the gas price review scheduled for April next year. But Petroleum Minister M Veerappa Moily will have to work hard to convince his Cabinet colleagues heading the finance, fertiliser and power ministries that this has to be done. The petroleum ministry has already moved a Cabinet note seeking to raise the price from $4.205 at present to $6.775 per mmbtu (million metric British thermal units). This will increase input costs, the brunt of which will have to be borne by the finance, fertiliser and power ministries, apart from consumers. Gas producers are also unhappy with the price the petroleum ministry has set, but for a different reason - they find the hike too low.

Gas prices are controlled by the government under the Administered Price Mechanism (APM). But how did the petroleum ministry arrive at the figure of $6.775 per mmbtu for domestic gas? It did so by taking the average price of the last four quarters of imported gas and subtracting from it the cost of liquefaction, transportation and re-gasification. (Gas has to be liquefied before it can be transported over long distances through ships.)

The power sector is already reeling under the impact of increasing fuel costs. Domestic gas supply is low, while imported gas is expensive. Power producers using gas are being forced to lower production; some are even considering shutting down. If the price of domestic gas too is raised, it will hit them hard. Gas-based power plants using domestic gas currently produce around 18,000 megawatts (MW) and 1,000 MW are on the verge of being added. But none of the existing plants are running to full capacity. Plant officials maintain that though the supply of domestic gas is falling, they cannot switch to imported gas because it is just too costly.

On the other hand, Reliance Industries, which in partnership with BP operates the KG-D6 block off the Andhra Pradesh coast, wants the APM to be lifted altogether and the gas price linked to the market, so it can charge the same price paid for imported gas. It currently charges the APM set price of $4.2 per mmbtu. RIL officials believe that unless prices are raised, there is little incentive to invest for further exploration. Already output from the KG-D6 block has been dwindling. In private, most government officials agree with the demands of the likes of RIL, but add that they have to strike the balance, and cannot be seen as siding with private players.

Meanwhile, the power and fertiliser ministries have made their own calculations. The power ministry maintains that an increase of one dollar in gas price at the current exchange rate will impact the power sector directly by around Rs 6,450 crore annually. The fertiliser ministry's estimate is that every dollar rise in gas price will increase the total production costs of gas-based urea manufacturing plants by at least Rs 2,465 crore. There are currently 21 gas-based urea units producing 18 million metric tons of urea annually.  More plants with a total capacity of producing five MT per year, which at present use naphtha and other oil as fuel, are likely to switch to gas this financial year. They too will face the burden. Both ministries want the gas price to be set below $5 mmbtu. And since fertiliser is subsidised, the finance ministry will also face an additional burden.

Moily's hurdles are compounded by the fact that 2014 is an election year. Both fertilizers and power are poll sensitive issues. It is certain that the matter will be referred to the Cabinet Committee on Economic Affairs. It is politics which will finally decide if the domestic gas price is raised - and by how much.