Govt pumps up reforms, okays $8.4 price for gas

Written by fe Bureau | New Delhi | Updated: Jun 28 2013, 09:15am hrs
IN what could spur stagnant domestic production of natural gas, reduce the dependence of power and fertiliser companies on imports of expensive LNG and ease the subsidy burden on the fisc, the Cabinet Committee on Economic Affairs (CCEA) on Thursday approved hiking gas price to $8.4/mmbtu from $4.2 at present for a period of five years beginning April 2014. The decision, taken after a long meeting of the CCEA where the ministries presiding over user industries pitched for lower prices, would benefit Reliance Industries, BP and public sector ONGC and OIL, among others. The government will also earn higher revenue as the profit/revenue share from producers.

Sanjeev Prasad, co-head and senior executive director, Kotak Institutional Equities, said the move to hike gas prices was a positive and would further spur investment in the upstream sector. This will encourage investment, Prasad said, adding earnings of ONGC, RIL and Oil India would improve significantly. Analysts estimate RILs earnings will increase by 7-8% in FY15 while for OGC and OIL the rise will be 30-35%. However, the higher gas price will impact GAIL negatively since the firm uses gas for its petrochemicals division.

According to an estimate, every $1 hike in gas price would enrich the exchequer by $551 million at current levels of gas production. Fertiliser and power sectors have annualised gas consumption of 11 and 10 billion cubic meters at present. A more remunerative price for the fuel would prompt companies to invest more and its production would eventually go up. Higher gas price could also lead to an increase in electricity tariff and higher fertiliser prices or subsidy burden for the government.

Sources said gas prices could be revised on a quarterly basis to factor in changes in select global contracts. Analysts said tariff for power from gas-based plants could go up by 15-20 paise per kWh once the new price is implemented.

Welcoming the decision, former Planning Commission member and energy expert Kirit Parikh said: It would have been better if gas prices were completely liberalised, save for sales to one or two sectors like public transport. If (LNG) import is feasible at only much higher prices, keeping domestic gas low would put a big burden on the fisc.

About 18,000 MW gas-based power capacity which used to get gas from Reliances KG D6 block are currently dependent on other sources because of the sharp decline in KG D6 output and running at 30-40% plant load factor. If D6 output increases, these plants would be able to use more of the installed capacities. Capacities of another 10,000 MW are delayed because of gas shortage.

The approved price is close to $8.8 recommended by the C Rangarajan panel that /reviewed existing production-sharing contracts and suggested a new pricing formula for domestic gas. The petroleum ministry, however, wanted the domestic gas price to reflect the price at which India imports liquefied natural gas (LNG) from countries such as Malaysia, Saudi Arabia, Qatar and Nigeria.

The ministry of fertiliser had argued that implementation of the panels recommendations could adversely affect the governments subsidy reduction plan and make the new urea investment policy redundant. It is another matter that in the absence of domestic gas, fertiliser companies will have to import gas at thrice the domestic price of $ 4.2/mmbtu and this would have increased the government subsidy bill. The power ministry had opposed the proposed doubling of gas price, saying it would put an additional burden of Rs 46,360 crore on the power sector. Gas supplies to the sector from the KG D6 block have almost halted, after production hit an all-time low of 15.5 mmscmd from a peak of 69.43 mmscmd in March 2010.

The Rangarajan panels recommendation was based on the average of net back LNG price (price excluding ocean freight, transportation cost and duties), including term and spot contracts being imported into the country, price of US Henry Hub, UKs National Balancing Point and Japan Custom Cleared LNG prices.