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Rediff.com  » Business » 3 ministries oppose Rangarajan committee's gas pricing formula

3 ministries oppose Rangarajan committee's gas pricing formula

April 26, 2013 10:30 IST

The finance ministry has rejected the formula and, instead, suggested an alternative that takes into account well-head prices of suppliers in Qatar, Oman, Abu Dhabi and Malaysia.

Even before an empowered group of ministers starts deliberating on a revision in natural gas prices, the finance, power and fertiliser ministries have raised a red flag on the recommendations of the Rangarajan panel. Only the Planning Commission seems to be in agreement with the committee’s proposal to use a proposed formula as “an interim or transitional solution” till March 2017.

According to the Rangarajan formula, the base price of domestic natural gas would go up to $8.8 a million British thermal unit (mBtu) from the $4.2 currently applicable for gas produced from Reliance Industries’ KG-D6 and a host of other fields.

The finance ministry has rejected the formula and, instead, suggested an alternative that takes into account well-head prices of suppliers in Qatar, Oman, Abu Dhabi and Malaysia. While opposing the Rangarajan formula, which uses the trailing 12-month average of the producer price of LNG imports to India and the price prevalent in the US, Europe and Japan, the finance ministry said there was no logic in linking domestic price with spot LNG contracts.

In its comments on a note circulated by the petroleum ministry, the fertiliser ministry foresees Rs 16,992-crore annual subsidy outgo by the end of the 12th Plan in 2016-17, considering the base price of gas would rise from $4.2 to $8.8 an mBtu. The power ministry, too, sees an impact of around Rs 43,360 crore annually, considering the total gas-based capacity would rise to about 28,000 Mw in a few years.

It adds, based on the existing capacity, the variable cost would be around Rs 5.40 a kilowatt hour (unit), taking the total generation cost to Rs 6.40 a unit. “The base price of domestic gas beyond $5 an mBtu is unviable for power generation,” the ministry says.

A senior petroleum ministry official said a decision on the report commissioned by the Prime Minister’s Office would be taken only by the EGoM. “No date for a meeting of the EGoM has yet been fixed,” he said.

The three ministries, and the Planning Commission, strongly opposed the concept of the same pricing system for shale gas and coal-bed methane. The plan panel batted for CBM and shale gas to be priced on a free-market basis, completely free of approvals. The petroleum ministry is, however, in favour of pricing all natural gas in the same policy perspective.

Different price for different consumers

The power ministry has also said reasonable returns to gas producers could be assured while fixing the price, but downstream consuming sectors should be charged a different price, commensurate with price appetite. The Rangarajan committee had proposed uniform pricing, irrespective of the consumer.

One of the major reservations of the power ministry was the pricing of domestic gas in dollar terms. It termed the pricing on dollar as “incongruous” as domestic gas was produced and consumed within the country and end consumers like the power sector had to bear the burden of forex variation. The power ministry also showed displeasure in fixing price on a monthly basis and mooted that the gas price formula should have a cap to keep it less volatile.

Pricing dilemma

Rangarajan panel's take

The formula: Based on average of price at other producing destinations and the volume-weighted price of the US’ Henry Hub, the UK’s NBP and Japan Custom Cleared (on net-back basis, since it is an importer)

Price impact: The base price of domestic natural gas would go up to $8.8 an mBtu

Changing tack: The current cost-recovery model on production would change to revenue sharing

Key concerns

Fertiliser ministry:  Foresees Rs 16,992-crore annual subsidy outgo by the end of 12th Plan

Power ministry: Sees an impact of around Rs 43,360 crore annually; variable cost on power would be around Rs 5.40 a unit, taking the total generation cost to Rs 6.40 a unit

Finance ministry: Wants an alternative formula that takes into account well-head prices of suppliers in Qatar, Oman, Abu Dhabi and Malaysia

Who will get affected?

RIL, ONGC, OIL, Cairn India, GSPC, BP

Jyoti Mukul & Shine Jacob in New Delhi
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