Supreme Court wants to know why gas price formula is 'complex'

Written by Siddhartha P Saikia | New Delhi | Updated: Apr 4 2014, 07:19am hrs
Gas pricingOn March 24, the EC had asked the government to defer the implementation of the decision to revise gas price. Reuters
In what could spell fresh trouble for Indias hydrocarbon explorers, the Supreme Court on Thursday asked the government to explain why it chose the complex Rangarajan formula for gas pricing when it could have adopted simpler methods like cost-plus pricing or revenue-sharing.

A bench headed by Justice BS Chauhan asked the government to file an affidavit explaining how Canadas Niko Resources, which holds 10% in Mukesh Ambani-led Reliance Industries KG D6 block, is able to sell gas in Bangladesh at $2.34 mmBtu, half the current price in India.

The SCs direction while considering two separate public interest litigations (PILs) one by Communist Party of India leader Gurudas Dasgupta and another by NGO Common Cause has complicated matters for the government.

On March 24, the Election Commission had asked the government to defer the implementation of the decision to revise gas price from April 1, as per the guidelines based on Rangarajan formula.

Appearing for the government, solicitor general Mohan Parasaran told the court that there were major differences between the oil fields in India

and Bangladesh. While Bangladesh has on-land fields which require less time and investment to explore and develop, India has deep water blocks such as KG D6, off the Andhra coast.

He further argued that the government is not aware of the terms and conditions of the production sharing contract between Niko and the Bangladesh government and also the stage of exploration in the neighbouring country.

The court, however, asked the government to filed a detailed affidavit explaining the differences in prices and posted the matter for further hearing on April 9.

While the gas price hike is stuck in the court and the Election Commission, analysts say even the Rangarajan formula would not be enough for gas exploration and production in India to be remunerative and stimulate investments. Stating that only 69 tcf of proved and possible gas resources have been discovered over the last six decades, a report by global consultancy firm IHS-CERA said 12 major basins showed potential for another 64 tcf of yet-to-be-found (YTF) reserves. However, it added, these lie in deep water, ultra deep water or other difficult areas necessitating very high levels of risk capital. It said even the price of $8/mmBtu (which is roughly what the Rangarajan formula would immediately yield), deep water discoveries are hardly economic. A price of $10/mmBtu and above is required to develop most of the deep water, ultra deep water and technically challenging shallow water discoveries, IHS-CERA said in the report.

As per the Rangarajan formula, domestic gas prices will be determined on a quarterly basis as an average of three major international hub prices (Henry Hub of the US, National Balancing Point of the UK, and the Japanese Crude Cocktail) and the cost of imported LNG into India. The Cabinet had approved the formula which would have nearly doubled the gas price immediately from the current $4.2/mmBtu. This was done in June 2013 for state-run explorer ONGC and others. It was approved for Reliance Industries in December 2013, subject to the company giving bank guarantees equivalent to the incremental revenue, given the arbitration initiated over alleged suppression of gas output at the basin.

RIL maintains that some of its future deep-water exploration like the Cauvery basin fields would be viable only at free market prices. ONGC has said while some of its deep-water fields could be viable with the Rangarajan pricing mechanism, many upcoming exploration projects in the deep- and ultra deep-water zones might need higher prices.

Senior counsel for RIL Harish Salve said he would address the court's queries when he makes the submission.

Additional solicitor general L Nageswar Rao urged the court not to interfere with the government's policy decision taken in the best interests of the country. Fixation of price based on the gas-pricing formula arrived at by the Rangarajan committee is a policy decision and cannot be the subject matter of challenge, he said.

The central government also argued that pricing of gas, keeping markets competitive enough to attract investors and balancing the country's energy security with other sectors are matters of economic policy which should be left to the government.

Criticising the Rangarajan formula, the two PILs had alleged that the formula estimated the price by averaging some numbers derived from foreign gas markets even though those numbers neither represent well head price of conventional natural gas anywhere in the world nor reflect the cost of service for producing conventional natural gas in India.

Besides, the cost of production at the well-head was never calculated by the Rangarajan committee and no attempt was made to determine this figure accurately and independent of the contractor, counsel Prashant Bhushan, appearing for the NGO, said. Further, no attempt was made to study such cost of gas at the well-head internationally, Bhushan said, adding there was absolutely no justification for fixing the price in dollar terms for domestically produced gas.

Meanwhile, Barclays Equity Research said the price as per Rangarajan formula will be $8.3 per mmBtu in 2014-15. This, it said, will rise to $9.1/mmBtu in the following year and further to $9.4/mmBtu in 2016-17. The formula approved by the government will apply to all natural gas produced in India, whether conventional, shale or even CBM.