The government on Saturday approved raising natural gas price to $5.61 per mmBtu from November 1 but Reliance Industries will continue to get current $4.2 rate till it makes up for shortfall in output from KG-D6 block.
The Cabinet modified the Rangarajan formula approved by previous UPA government to bring down the increase in rates from $8.4 to $5.61, Finance Minister Arun Jaitley said.
The new formula will be effective November 1 and rates will be revised every six months with the next revision being on April 1.
For RIL's flagging D1&D3 gas fields in KG-D6 block where output should have been 80 mmscmd but is languishing at less than 8 mmscmd, the Cabinet decided the current rates will continue to apply.Consumers will, however, pay the revised increased price but RIL will get only $4.2 with the difference being deposited in an escrow account.
RIL will get the higher rates if it is legally able to prove that it did not deliberately cut production and output fall was a result of geological reasons as it claims.
Higher gas prices would increase the expense of running power stations and fertilizer plants, raising infrastructure and food costs and accelerating the rate of inflation.
Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7 per cent of the nation's power generation capacity based on gas).
Also, there would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas. Gas price increase had been deferred on three occasions previously.
The previous UPA government had in June last year approved a price formula suggested by a panel headed by C Rangarajan and re-confirmed it in December 2013 with certain conditions for Reliance Industries' eastern offshore KG-D6 block.
The formula was to be implemented from April 1, 2014, when the tenure of $ 4.205 per million British thermal unit price fixed for KG-D6 gas was to expire, but before a rate could be notified, general elections were announced and Election Commission asked the then government to defer it till completion of polls.
On June 25, the new BJP-led government deferred it for a further three months to September-end saying the issue required "comprehensive consultations."
The revision was again deferred by 45 days on September 24 as the government seemed wary of taking an unpopular decision just before assembly election in crucial states of Maharashtra and Haryana.
The formula, which was notified on January 10, will more than double the current $ 4.2 per million British thermal units.
The new gas price was to be applicable to both state-owned ONGC produced fuel as well as private sector RIL's gas.
The delay in gas prices had most affected Reliance Industries and state-owned Oil and Natural Gas Corp (ONGC).
RIL and its partners BP plc of UK and Canada's Niko Resources on July 6 slapped an arbitration notice on the government seeking implementation of a gas price revision which was due to them on April 1.
For ONGC, the nation's largest gas producer, the postponement of price increase was seen as a dampener to its stock valuation particularly when the government had plans to sell a 5 per cent stake in the company to help narrow budget deficit.
India's offshore oil and gas industry is "at risk" in the absence of higher gas prices, BP CEO Robert Dudley had said on June 17.
RIL has been selling gas from KG-D6 at the same price since it started production in April 2009.
The government increased ONGC and Oil India Ltd's selling price to match RIL's in May 2010.