Rangarajan for $8 gas, production-linked payments

Dec 25 2012, 04:09 IST
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SummaryThe Rangarajan committee on gas pricing and petroleum profit-sharing has recommended a near doubling of domestic natural gas price from $4.2 per unit besides sweeping changes in the way profits from oil and gas fields are shared with the government in the future.

The Rangarajan committee on gas pricing and petroleum profit-sharing has recommended a near doubling of domestic natural gas price from $4.2 per unit besides sweeping changes in the way profits from oil and gas fields are shared with the government in the future.

Sources said the panel has recommended an increase in domestic gas price from $4.2 per million metric British thermal unit (mmBtu) to nearly $8, which may be an acceptable compromise between the interests of producers who bring risk capital, the government that owns natural resources and user industries like power and steel. The fertiliser department, which administers the subsidy on the commodity, last week agreed to the $8 figure. Fertiliser firms get the highest priority in buying gas from domestic producer Reliance Industries that operates the once-prolific D6 block in the Krishna Godavari basin. The sector is not affected by a price increase as the government fully compensates for selling their products at the regulated price and earns a 12% return on investment. A $4 per unit increase in the price of gas will add another R35,000-40,000 crore to the Centre's fertiliser subsidy burden.

If gas price is increased to $8, electricity tariff for the consumer may go up by R1.6 per unit. CNG for automobiles will also become expensive, but not the subsidised LPG for households.

C Rangarajan, chairman of the economic advisory council to the Prime Minister, told FE the committee headed by him that reviewed the two contentious issues of pricing and profit-sharing has given its recommendations. “It (the report) is still not in the public domain. Once it is uploaded in the PMEAC website, I can comment on it,” said Rangarajan, who was asked to review the formula for splitting profits between producers and the government after the Comptroller and Auditor General of India (CAG) found the existing one enabled companies to delay the government's profit share.

Industry sources said natural gas price ought to be linked not only to market forces, but also to geological challenges and hence, cannot be the same for all blocks.

“For gas from ultra-deep water blocks (such as RIL's D6 block), which are more than 3,000 km below sea level, a price of $10-12 per unit may be viable, while production from blocks at depths less than that may be viable for a price of $7.5-9 a unit,” said an industry executive, who asked not to be named.

“The proposed price revision will definitely improve the bottomline of not only RIL, but also of ONGC and Oil India. It will also increase the earnings per share of these companies,” said Kalpana Jain, senior director, Deloitte.

The Rangarajan panel also recommended replacing the existing profit-sharing formula based on the level of investment made and revenue earned from a field with a production-based-payment scale for future contracts. Hen production or price goes up, the exchequer stands to earn more. In future auctions, winners of oil and gas blocks will continue to be selected based on the existing weight given for bidders' technical capability, committed exploration work and the profit-sharing package. However, the profit-splitting formula will be different. The panel has suggested production-based payments to the government, which will be different for onland and off-shore fields of different geological complexities. The proposed model is expected to eliminate disputes related to cost recovery of the contractor, such as the one that is currently ongoing between RIL and the oil ministry.

The panel also suggested that contractors be allowed to continue exploration work throughout the mining lease period unlike the current scheme of allowing exploration only during the assigned period. Conducting exploration after the stipulated time by some of the producers was criticised by the CAG in his last performance audit of oil and gas blocks.

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