Ideas caFE: Should govt review the Rangarajan gas price formula

Written by Sarthak Ray | Updated: Jun 24 2014, 07:46am hrs
A review of the Rangarajan Committee formula on the price of domestic natural gas (DNG) has been hinted. The focus of this piece is on DNG produced under production sharing contracts (PSCs), which dictate exploration, production, sale and share of government revenue.

There is a contractual obligation to sell DNG at an arms-length, market-determined price. PSC dictates that DNG can be sold only domestically and the price should not be tweaked to the benefit of either party to the contract. Thoughts like cost-plus or percentage increase over a base price have no validity for price of the gas produced under PSC. Such aim is void ab initio and cannot form the objective of any review.

The gas production companies had expected a rational price to be discovered. The last price discovered for a large pipeline-connected discovery has a saddle point around $15. Anything less is a loss to the producer/seller.

Any review that upholds the terms of the contract is likely to lead to a higher price. A sovereign-directed low price shall violate the sanctity of the contract. By entering into commercial contracts, the sovereign accepts some obligations and limitations on its unfettered rights. Even the Supreme Court has held that while the government is the owner of the minerals, it still needs to yield to the terms of the contract.

Globally, the number of expert players in E&P is small. Participants are clued in on the contract administration in various countries. Violation of contract shall kill the participation in NELP X and the following rounds. The repercussions are likely to flow to all contractual participation of overseas companies in many fields.

Besides, reviews generally take a lot of time, something that the industry cant afford. A review means a long animated suspension and uncertainty for the industry. The delay and price uncertainty shall imply suspension of developments of all new projects that have become commercial on the basis of prices higher than $4.20. Many existing sales agreements have already expired. In this commercial void, companies could rightly stop supplies on contract basis. They may shift to spot-deal basis which maybe far more expensive and erratic for buyers, or suspend production. The exploration companies may also suspend work till clarifications are available on the way forward.

It is well known that most of 100-plus discoveries made during last many years have not been developed in the absence of commercially viable price. Can India afford it Isnt extraction of every last molecule from subsurface a better driver for economy

Industry wants a review to suggest the transition path for reaching the full implementation of PSC commitments. Rangarajan accepted the sanctity of the contract and the ultimate goal of gas-on-gas competition. Looking at the fiscal implications for the government, he proposed the current formula of an average price as an intermediate measure. He recommended a gradual transition to full market prices by 2018.

Industry expressed its unhappiness with the resultant low price, and a provisional move away from contract. It agreed to it only as a contingent step, in view of urgency to continue production, exploration and conversion of current discoveries to production. In May 2013, the government tasked the Kelkar committee to look at the transition issue and suggest the roadmap to implement the market price. That review is work in progress.

Any recommended price that fulfils the contract terms shall be much higher than the price proposed by Rangarajan while any contract violation to go on a different, artificially created basis shall be an albatross around the neck of not only the oil and gas industry but also any future project of natural resources, energy or infrastructure that has capital intensity, long gestation and market sensitive prices. Any delay or uncertainty shall have a negative repercussion on oil and gas exploration, development and productionan eventuality India can ill-afford.

The right way forward shall be to implement the Rangarajan formula and review the transition till a final gas-on-gas exchange can be created, a task handed to the the Kelkar Committee.

The author (Ashu Sagar) is secretary general, the Association of Oil & Gas Operators


The Rangarajan committee formula on gas pricing needs to be reviewed. So, the governments decision, to that effect, is a welcome one. The formula is defective because the price per mmBtu of gas extracted it prescribes is very high, without there being any merit to fixing such a cost. It has been done to primarily benefit the large corporations in the sector.

If one looks at what the petroleum minister in the previous government suggested, it is clear that the gas price hike is in line with what Reliance Industries Ltd (RIL) has been demanding. RIL has been demanding $13.8 per mmBtu and the minister had suggested that prices be increased to $8.4 per mmBtufrom the current $4.2 per mmBtuin the first year, then to $10 per mmBtu in the second, $12 per mmBtu in the third, before eventually hiking it to $14 per mmBtu.

Such a hike would greatly add to the subsidy burden of the countrythe government will be paying out R36,000 crore as increased subsidy per year on gas while RIL would be raking in R32,400 crore in increased annual profits.

This kind of policymaking to satiate big corporations is exploitative of the common goods of the country.

At $4.2 per mmBtu, the price of gas is a sustainable one for extractors. State-owned Oil and Natural Gas Corporation (ONGC) is selling gas from various fields in the range of $2.5-$5.25 per mmBtu. So, $4.2 is a good price. The government must not decide the price of gas on the basis of the Rangarajan formula because the formula itself it defective.

While market prices of gas in other countries must be considered to arrive at a price, the government can't cherry-pick countries to justify high prices to be paid to the corporates. For example, the Rangarajan formula takes into account import prices of Japanese gas ($16.4 per mmBtu), one of the highest tariffs for gas globally, while in Bangladesh, Niko, a partner of RIL, extracts gas for $2.34 per mmBtu, which is significantly lower than the tariff being paid to extractors in India. The formula chooses European gas prices over the Russian one which is much lower.

Another problem with the formula is that it talks of paying the extractors in dollars while rupee payments will work out to be much cheaper. So, the formula fixes a price that gives undue benefits to the corporations. Apart from there being little reason to implement the Rangarajan panel-determined price, there are the fallouts of the implementation of such a high price to consider. This price will ruin the industry, especially fertiliser and power industries.

The Parliamentary Standing Committee on Finance had submitted a report on the economic impact of the hiking of the gas prices to the previous government in which it had said that the cost of urea production will increase by R1,384 per metric tonne for every $1 increase per mmBtu of gas.

The government will have to factor in an increase in subsidy for fertiliser to offset the increased costs of urea on the farmers. This again compounds the subsidy problem. And if the government were to minimise the subsidy outgo here and pass on some of the cost to the farmers, then the prices of food items are sure to go up. This inflation will hit the common man hard.

Another argument being forwarded in support of the Rangarajan formula is that the higher price will benefit oil PSU ONGC. But should the gas price be decided on the basis of it benefiting big corporations, whether it is ONGC or RIL Why is it that when the price is viable for one Indian company, another is claiming the opposite in its own context

So, what the government should do now is constitute a neutral committee to review the Rangarajan panel recommendations. Since the matter is being examined by the Supreme Court, I hope that it issues an order to this effect.

The author (Gurudas Dasgupta) is a CPI leader and former Parliamentarian