The petroleum ministry has proposed that higher gas price as per the Rangarajan formula could be allowed only for incremental production over and above the current levels, as an alternative to applying the formula unconditionally from July 1. Restricting the higher price to additional output, the ministry feels, would incentivise production while also protecting the interests of consuming industries like power and fertilisers.
The ministry in a draft note for the consideration of the Cabinet Committee on Economic Affairs (CCEA) wrote: “Average gas production for the year 2013-14 would be taken as the base and production over and above this current level would be eligible for the higher gas price. This principle for pricing of gas will be applicable to all natural gas produced domestically, irrespective of the source, whether conventional, shale, CBM, etc.” The ministry has also said the gas price would be effective prospectively from the day of implementation (producers wanted it to be effective from April 1, 2014).
The new move could be a dampener for ONGC, which produces 60 million metric standard cubic metres per day (mmscmd) of gas, more than two-thirds of the country’s total production of the fuel, as there are little chances that the PSU would dramatically increase its production. The same applies to Oil India, another PSU gas producer.
As for Reliance Industries and its foreign partners BP of the UK and Canada’s Niko Resources, which are currently engaged in arbitration with the government over alleged suppression of gas output at the KG-D6 block, the ministry has proposed that till the issue is resolved, for the shortfall quantity of gas as per the approved addendum to initial development plan (AIDP), the difference in the revenue realised due to revised gas price could be deposited in an escrow account of a nationalised bank. The account, the ministry said, would be operated by Directorate General of Hydrocarbons (DGH) and the bank can invest the funds to earn interest.
RIL, it may be recalled, was asked to submit a bank guarantee for the revenue amounting to the difference between the committed and actual production, in order to be able to sell gas at revised prices.
A higher gas price for the entire current production would mean ONGC’s annual revenues would rise by R12,000 crore and OIL’s by R1,500 crore. For RIL and its partners, at the current KG-D6 output of 12-13 mmscmd, the annual revenue increase would be R3,000 crore.
The Congress-led UPA government had approved a formula devised by then chief of the Prime Minister’s Economic Advisory Council (PMEAC) C Rangarajan, which was to be effective from April 1, but it could not implement it because of an Election Commission order. If applied, the formula would lead to a doubling of the price of domestic gas from $4.2/million British thermal units.
The petroleum ministry is of the opinion that the issue of pricing of gas would need to be seen in the context of achieving the multiple objectives of incentivising domestic gas exploration and production on the supply side and meeting the higher subsidy outgo in successive budgets for the fertiliser and power sectors.
Therefore, the gas pricing need to strike a balance between the requirements of the exploration and production sector and the burden on the government exchequer.
India's natural gas output went down to 35.4 billion cubic metres (bcm) in FY14 from 47.56 bcm in FY12.
“Incentivising by giving higher gas price for incremental production would lead to more focused efforts on the part of contractors for enhancing production in the country. This would be a result-oriented approach, where contractors would also align themselves to the government's objective of enhancing production in the country and will result in lesser dependency on imports,” the draft CCEA note said.
The petroleum ministry has also said that the pricing of gas would be on net calorific value (NCV). This is because historically the gas price in India is based on NCV basis only. In addition, in case the gas price is made on gross calorific value (GCV), it would lead to an additional burden on fertiliser and power companies as it would increase prices by nearly 10%.