Double Nelp gas price to $8, says Rangarajan

Written by fe Bureau | New Delhi | Updated: Jan 3 2013, 07:57am hrs
C RangarajanC Rangarajan
Come March 2014, Reliance Industries and public sector ONGC and OIL will be able to sell their domestically-produced natural gas at the average global price at which India imports the fuel, excluding certain incidental costs, if the government accepts the recommendation of a panel led by Prime Ministers Economic Advisory Councils chairman C Rangarajan.

This means a jump in the price of a substantial amount of gas produced in the country from $4.2 per million British thermal unit (mmBtu) now to slightly under $8. About 37% of the 114 million cubic metres of the commodity produced in 2011 was from blocks licensed under the new exploration and licensing policy (Nelp), the pricing of which the panel reviewed. India imports more gas than what it produces at two-three times the regulated local price. Companies are still not satisfied with the pricing formula suggested by the panel as transportation and liquefaction costs of imported gas that are proposed to be excluded from the domestic gas price account for roughly $4 per mmBtu.

The panel did not mention any specific price, but when asked what could be the price based on the formula suggested by the panel, Rangarajan said that it could be slightly below $8.

The committee, which gave its suggestions to Manmohan Singh recently, said such a global average price may be interpreted as an arms length competitive price that producers like RIL may charge.Gas is sold at arms length price based on a government-approved formula to industrial customers selected from a list of priority customers in fertilisers, power, city gas distribution, steel and petrochemical industries.

Rangarajans report that comes prior to a price revision due in March 2014 suggests that the pricing regime should be revised again five years from hence.

The proposed policy reflects the average price of gas realised by countries exporting gas to India (excluding certain costs) and the prices quoted at major markets of North America, Europe, Eurasia and Japan that account for three-fourths of the 3.2 trillion cubic metres of gas traded in the world. The result is expected to balance the high price prevailing in Asia and the low price in US.

Industry sources said gas producers like Reliance are not happy with the proposal as it apparently does not reflect risks involved in exploration. Producers have been asking for market-linked pricing and the suggested exclusion of transportation and liquefaction costs from the global price to arrive at the benchmark Indian arms length price clearly did not satisfy them. These two roughly work out to about $4. Most of the global gas majors have been producing from the same fields for quite some time and have already taken out their risk capital. Therefore, adoption of global average price exclusive of these costs is not desirable, said an oil industry executive, who asked not to be named.

The panel which studies the design of oil and gas contracts said future contracts should provide for a fixed matrix of what revenue to be shared with the government at a particular output and price without any regard for whether the company has recovered its investments or not.

That is, the governments share should go up as production and price go up, without any reference to the investments made or recovered by the company, as is the case now. Under the existing framework, oil and gas producers are free to decide whether or not to share profits with the state before recovering their full investments depending on the bids they made to win the block. Also, the ratio for sharing profits with the state before and after full cost recovery is based on the bids made at the auction. This necessitates a a close scrutiny of costs as there is incentive for contractors to book costs that do not reflect the true economic cost, the panel said.

The existing cost recovery system is causing all sorts of problems. This arrangement has led to disputes and delays in projects. We want to move away from the present system, Rangarajan said here after the report was made public. The idea is to do away with the need for keeping a close watch over whether costs are being inflated using various means including transfer pricing.

Companies said they have no problem with the proposal to redesign future contracts as they would take new norms into account while bidding.

The panel also said the governments statutory auditor would select blocks for auditing based on financial materiality, and would focus on blocks in the exploration and development phase, when costs incurred are higher. Other blocks would be ordinarily audited by CAG-empanelled auditors, although the CAG would continue to have its statutory freedom to directly audit even these.


* Domestic gas price from many blocks could double from $4.2 mmBtu to near-$8

* About 37% of natural gas produced in 2011 was from blocks licensed under Nelp

* Transport & liquefaction costs of imported gas are proposed to be excluded

* Future pacts may set fixed matrix of revenue share regardless of cost recovery

* Formula will help raise govts revenue share as gas production and price go up