State-owned Oil and Natural Gas Corp (ONGC) has sought a review of the natural gas pricing formula as rates have dropped below cost. India’s largest natural gas producer demanded a floor or minimum price of natural gas be fixed at USD 4.2 per million British thermal unit for the business to make economic sense. The BJP-led government in October 2014 had evolved a new pricing formula using rates prevelant in gas surplus nations like the US, Canada and Russia to determine rates in a net importing country. Prices have halved to USD 2.5 per mmBtu since the formula was implemented. “Keeping in view of cost of production of gas, cost of alternate fuels and other market dynamics, Ministry of Petroleum and Natural Gas is requested to review the existing domestic gas price formula and provide a floor price at least to the level of earlier APM (regulated) price (USD 4.20 per mmBtu)/ non-APM price (USD 4.20 to USD 5.25 per mmbtu) fixed in June 2010,” ONGC said in a communique.
The new formula provides for revising rates every six months – on April 1 and October 1, based on one-year average gas price in the surplus nations with a lag of one quarter. When the formula was implemented, rates went up from USD 4.2 to USD 5.05 per mmBtu but fell to USD 4.66 per mmBtu in April 2015 and to USD 3.82 in October that year. This fiscal, prices further dipped to USD 3.06 per mmBtu in April and to USD 2.50 per mmBtu in October. Oil Minister Dharmendra Pradhan in a written reply to a question in Lok Sabha on March 20 had stated that the cost of production of natural gas in the prolific Krishna Godavari basin is between USD 4.99 per mmBtu and USD 7.30 per mmBtu.
The same for other basins is in the range of USD 3.80 per mmBtu to USD 6.59 per mmBtu, he had said adding the production costs of companies vary from field to field depending upon size of the reservoir, location, logistcs and availability of surface facilities. Next natural gas price revision is due on April 1 and it is widely expected that rates may go up by up to 8 per cent to USD 2.7 per mmBtu, still way short of the cost. As per the mechanism approved in October 2014, the price of domestically produced natural gas is to be revised every six months — April 1 and October 1 — using weighted average or rates prevalent in gas-surplus economies at Henry Hub of US, National Balancing Point of the UK, rates in Alberta (Canada) and Russia with a lag of one quarter.
The rates for April 1, 2017 to September 30, 2017 period will be based on average price at the international hubs during January 1, 2016 to December 31, 2016. Alongside the rate for gas from existing fields, the price for undeveloped difficult fields would also go up from current rate of USD 5.3 per mmBtu. ONGC is the country’s biggest gas producer, accounting for some 60 per cent of the 90 million standard cubic meters per day current output.