Power, fertilizer ministries may oppose increase in gas price - Quoted in the Mint

The government may not be able to raise the prices of natural gas as much as it wants to because the fertilizer and power ministries have reservations on the recommended pricing formula.

The proposed freeing of gas prices and a resultant increase will directly benefit local producers such as Mukesh Ambani-led Reliance Industries Ltd and state-owned Oil and Natural Gas Corp. Ltd and Oil India Ltd.

 

A panel led by C. Rangarajan, the Prime Minister’s economic adviser, in December suggested a system that would price the fuel at $8-8.5 per million metric British thermal units (mmBtu). This compares with the current domestic prices that range between $3.5 and $5.73 per mmBtu. Imported natural gas costs around $14.17 per mmBtu.

 

Finance minister P. Chidambaram said in his budget presentation on 28 February that the government will review its pricing policy on natural gas and remove uncertainties in this regard.

 

The fertilizer ministry may object to the Rangarajan formula and instead suggest the fuel be priced at around $6 mmBtu, according to three ministry officials who spoke on condition of anonymity. A final view, however, has not yet been taken, they said.

 

“We are yet to respond to the note (on the Rangarajan formula that has been circulated among the relevant ministries). High gas prices would have to be passed on to consumers, in this case state electricity boards, who are already finding it difficult to purchase power,” a power ministry official said. “We are not in favour of high prices and will respond accordingly.”

 

Another official in the power ministry also expressed reservations over the recommended pricing mechanism. Both officials declined to be named.

 

The views of these two ministries are important because the sectors they oversee are the largest consumers of natural gas in the country.

 

The fertilizer ministry’s likely view will be more representative of global prices than what has been suggested by the Rangarajan panel, according to Dipesh Dipu, a partner at Jenissi Management Consultants, a Hyderabad-based resources-focused consultancy.

“However, it will definitively have a negative impact on the future profitability of gas suppliers,” Dipu said.

 

Sudhir Vasudeva, chairman and managing director of ONGC, and S.K. Srivastava, chairman and managing director of Oil India, did not respond to phone calls or messages sent to their mobile phones. Queries emailed on Monday to a Reliance Industries spokesperson remained unanswered.

The Rangarajan panel had, in its December report, indexed the price of domestically produced gas to prices prevailing in the international market, effectively recommending the freeing of gas prices in India and scrapping the administered pricing mechanism (APM).

 

It suggested a formula in which the final base price was arrived at by the simple average of the respective weighted averages of the prices of imported gas across sectors over a 12-month period and that of prices in the three major international gas trading hubs. These are the US Henry hub, the UK National Balancing Point and Japan’s custom-cleared rate.

 

The cost of imported gas was calculated on the basis of the so-called netback mechanism, in which transport and liquefaction costs are subtracted from the landed price of gas to arrive at the implied base price.

 

The fertilizer ministry is of the opinion that instead of a simple average, the final price should be arrived at by a weighted average of the two respective weighted averages themselves.

 

“Since domestic gas is the country’s natural resource, with a social objective, its price cannot be indexed to external prices. Domestic gas prices in various countries including the Middle East and Africa are extremely economical even today,” said one of the fertilizer ministry officials cited earlier. “But, if the government does want to index it to global prices, the formula suggested by the fertilizer industry is better as it keeps the final base price in check.”

 

The matter of natural gas from domestic sources priced in dollars and not rupees has also been raised in the parliamentary standing committee on fertilizers, Mint reported on 12 December.

 

There are four major pricing regimes for domestic gas in India—under APM, non-APM, pre-new exploration licensing policy (Nelp) and Nelp. The government allocates rights to explore fields through bidding under Nelp, which started in January 1999.

 

Currently, APM and Nelp gas are priced at $4.2 per mmBtu, with gas from pre-Nelp blocks costing between $3.5 and $5.73 per mmBtu. The prevailing basic price of imported gas is around $14.17 per mmBtu. The price of gas produced at Reliance Industries’ deepwater KG-D6 field off the east coast has been fixed at $4.2 per mmBtu till 2014.

 

India’s power and fertilizer sectors have a demand of 135 million standard cu. m per day (mscmd) and 62 mscmd, respectively. This is expected to reach 171 mscmd and 113 mscmd, respectively, in 2014-15, according to the petroleum ministry.