The finance ministry has sent a proposal for premium gas pricing back to the petroleum ministry, which suggested that up to 50% of gas produced from difficult fields discovered since November 2014 be allowed to be sold at market prices, even as the rest is sold at government-approved prices.
According to official sources, the finance ministry has not turned down the petroleum ministry’s proposal, but raised ‘some concerns’ that would be responded to by the latter soon. The sources did not elaborate on the concerns raised.
Gas pricing has implications for the government’s revenue. The Centre plans a shift to a revenue-sharing regime in which companies have to indicate the quantity of oil and gas they will share with the government at various stages of production along with the rates.
The government also charges royalty and cess on hydrocarbon production — in the case of onshore fields the proceeds go the state governments, and the Centre gets the revenue from offshore fields.
As per the oil ministry’s proposal, first reported by FE on ‘difficult areas’ have been categorised into five groups, each of which would be eligible to sell a certain percentage of gas at market rates, with the range being 20-50%. The more difficult a field, the larger its share of sales in the open market. Difficult fields include high-temperature/high-pressure areas as also deepwater and ultra-deepwater ones. The explorers could discover the market price via auction.
While the higher gas price for difficult fields discovered after November 2014 is a promise made by the Modi government in October last year when it approved the new norms for pricing, explorers Reliance Industries and BP have been asking for premium pricing for discoveries made prior to that date as well.
The price of domestic natural gas, which was hiked in November last year by the NDA government, was reduced by 7.6% to $5.18 per million British thermal units effective April 1, as the relevant global benchmark prices remained subdued in the second half of 2014. The price is to be revised every six months.
According to consultancy firm McKinsey, India will be producing 47 million metric standard cubic metres per day (mmscmd) from “challenging fields” in the next two to five years. The country’s total gas output is around 90 mmscmd at present. Globally, countries such as the US, Russia, Malaysia, China, Canada and Colombia offer incentives for drilling of hydrocarbons from difficult reserves. The incentives include income tax breaks, investment allowance, lower production tax and pricing returns.