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Home > Business > Business Headline > Report

Govt cannot set price, supply of gas: ministry

Siddharth Zarabi in New Delhi | August 27, 2007 09:57 IST

The petroleum ministry has rejected key conclusions of two separate reports on the vexed issue of gas pricing and allocation ahead of the first meeting on the issue by the empowered group of ministers headed by External Affairs Minister Pranab Mukherjee on Monday.

The two reports concerned are by the Committee of Secretaries headed by Cabinet Secretary K M Chandrasekhar and another by the Prime Minister's Economic Advisory Council headed by C Rangarajan.  They were submitted at the end of July and mid-August, respectively.

Reiterating an earlier stand, a 46-page note prepared by the ministry for the meeting said the government could only formulate a gas supply prioritisation policy that encouraged the use of gas in certain sectors.

However, production-sharing contracts under the new exploration and licensing policy, which involves private sector participation, do not empower the government to allocate gas for priority sectors.

These views contradict both reports that recommended priority-based allocation - first to the fertiliser sector, followed by power and then other users.

The petroleum ministry has also said the government's right in pricing gas is limited to examining whether a proposal conforms to an arm's-length pricing basis or not between buyer and seller.

"The government cannot impose differential pricing if the market can bear a higher price," the petroleum ministry's report said.

This view is crucial as the present debate arose out of differences between state-owned NTPC and Mukesh Ambani-controlled Reliance Industries Ltd [Get Quote] over pricing of gas being produced by RIL's deep-water block off the coast of Kakinada, Andhra Pradesh.

RIL struck gas in the block in 2002, which was declared the largest gas discovery in that year.

Recently, RIL sought to renegotiate contracted prices after it held independent bids with other potential buyers that priced gas higher than the contracted price. The matter is currently under litigation.

In addition, Reliance Natural Resources Ltd [Get Quote], an Anil Dhirubhai Ambani company, is also in court against RIL on the issue of gas allocation for its impending 10,000 Mw Dadri power plant in UP.

Prime Minister Manmohan Singh had ordered the formation of an EGoM, the decisions of which are final, to examine issues related to gas pricing and commercial utilisation under the NELP on August 13.

Under the provisions of the contract between RIL and the government, the company needs the government's approval for the formula or basis on which it values the gas, since this determines the government's share (in terms of profit, royalty and taxes) prior to the sale of gas. RIL submitted its proposal to the petroleum ministry for approval in May this year.

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