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Rediff.com  » Business » Oil Min proposes gas price hike to $6.7

Oil Min proposes gas price hike to $6.7

May 20, 2013 16:55 IST

Oil rigsOil Ministry has moved a Cabinet note to raise the price of natural gas produced by state-owned Oil and Natural Gas Corporation and OIL as well as private firms like Reliance Industries to $6.7, less than $8-8.5 hike previously expected.

In a note for the Cabinet Committee on Economic Affairs, the ministry has proposed raising gas price for state-run firms immediately and that for RIL from April 2014, sources privy to the development said.

ONGC/OIL and RIL currently get $4.2 per million British thermal unit as the price of natural gas.

The ministry wants Rangarajan Committee recommendation of pricing domestically produced natural gas at an average of international hub prices and cost of imported LNG instead of present mechanism of market discovery be accepted with a minor modification. Instead of Rangarajan panel's suggestion of calculating gas price every month, the ministry has proposed notifying the gas price on a quarterly basis.

The gas price based on average of April-June rates would come to $6.775 per mmBtu, much less than doubling of rates previously expected.

Sources said the hike in natural gas price by $1 would result Rs 3,155 crore (Rs 31.55 billion) per annum hit on fertiliser plants for producing 23 million tons of urea this fiscal and Rs 4,144 crore (Rs 41.44 billion) a year for 32 million tons of urea production from 2017-18.

The impact of every US dollar increase in gas price would be about Rs 10,040 crore (Rs 100.4 billion) per annum on the power sector for 28,000 MW of electricity generating capacity.

Sources said ministry wants the pricing formula proposed by the panel to apply to all forms of natural gas -- conventional, shale and coal-bed methane.

Also, the price determined shall be applicable to all consuming sectors uniformly.

They said it wanted the new pricing guidelines to apply from 2013 itself on all domestically produced gas barring cases where it is either governed by a definite formula prescribed in the Production Sharing Contract or the government had previously fixed a tenure for the same.

This essentially meant that RIL would get the new price only from April 1, 2014 upon expiry of the fixed five-year term of current rate of $4.205 per mmBtu.

State-owned Oil and Natural Gas Corp and Oil India Ltd can, however, get the new rates this year itself for gas they produce from fields given to them on nomination basis by the government.

Gas from nominated fields, called APM gas, was last revised in June 2010 to $4.2 from $1.79.

The Rangarajan panel suggested rates may also not apply to BG Group-operated Panna/Mukta and Tapti fields in the western offshore as the current rates of $5.57-5.73 per mmBtu for the fuel produced from these are derived from a pre-defined formula detailed in the PSC.

However, Cairn India's eastern offshore Ravva gas, which is currently priced at $3.5-4.3 per mmBtu, may be revised as per the committee recommendations.

The gas price hike proposed falls short of what RIL and its partner BP plc of UK have been seeking.

They want domestic gas prices to be freed and benchmarked to the rate at which gas in its liquid form is imported into the country.

Liquefied natural gas currently is imported at about $14 per mmBtu.

Sources said the ministry said the Rangarajan panel report needs to be accepted so that domestically produced natural gas prices are fixed in a fair manner and in a way that incentivises production.

The panel had suggested taking a weighted average of the US, Europe and Japanese gas hubs or market price and then averaging it with the net imported price of liquefied natural gas to give sale price of domestically produced gas.

The Rangarajan Committee suggested averaging volume- weighted price of gas at US's Henry Hub, UK's NBP and Japan Customs Cleared prices for the trailing 12 months with the the net price that producer got from exporting LNG to India on a long-term contract.

Previously, RIL had from April 2014 wanted to price KG-D6 gas at the rate India pays for importing LNG on a long-term contract from Qatar.

India pays 12.67 per cent of the international oil rate plus $0.26 per mmBtu to Qatar.

At $100 per barrel oil rate, this translated into a gas price of $12.93.

The panel headed by C Rangarajan -- Chairman, Economic Advisory Council to the Prime Minister -- also suggested gas-on-gas competition after five years.

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