Industry body CII has drilled holes in the Rangarajan Panel report on pricing of natural gas based on average of global indices, saying the proposed formula was not in line with contractual provisions.
"The proposed formula is not in line with the intent of the Production Sharing Contracts (PSCs) as it neither provides for an element of price discovery through competitive arms-length bidding nor provides import parity prices," CII said commenting on the Rangarajan panel report.
The Rangarajan 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 liquid gas (LNG) to arrive at a sale price of domestically produced gas.
Price according to this formula would come to USD 8-8.5 per million British thermal unit, higher than current USD 4.2 per mmBtu, but it tantamounts to government dictating the rate rather than discovering what customers are willing to pay.
"In effect, domestic gas is discriminated vis-à-vis crude oil and the Committee's recommendations lead to a price which is at a 40-50 per cent discount to import parity," CII said.
CII said the proposed price setting mechanisms were not driven by the realities of the demand supply dynamics of the Indian market.
"There is substantial linkage to the US which is a mature market and very different from the Indian market. Hence, the resultant price produced by the formula does not take into account the risks and cost of exploration and development in India and is unlikely to incentivise investment in existing discoveries and future explorations in technically challenged areas like deep water, High Pressure-High Temperature (HPHT) and frontier areas," it said.
Stating that the proposed formula was complex and difficult to implement as it comprises too many variables with complex adjustments, CII suggested simplifying it by using an arithmetic average of Henry Hub, National balancing Point and Asia LNG delivered prices to reflect market prices at different markets/HUBs - Americas, Europe/FSU and Asia.
It also wanted provision of additional premium for technologically challenging areas as these are only viable at higher prices as also a roadmap for moving towards arms-length market determined pricing.
"While the report recognises that India needs to move towards achieving market determined pricing under gas-on-gas competition in the next 5 years, there are some concerns on the gas pricing recommendations and formula proposed by the Committee," it said.