Column : Can’t do gas pricing in a vacuum

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SummaryAvoid implementing Rangarajan’s prescription till fertiliser and power are freed up.

Barely a few months after the news of allowing RIL to increase the price by 3.5 times the current level on the supplies from its KG fields, the spectre of a steep hike has come to haunt users again.

A committee under C Rangarajan, mandated to suggest the design of future contracts for exploration and production of oil and gas, has also recommended a basis/formula to price domestically produced gas. It has suggested price to be benchmarked to four series of international prices, viz Henry Hub (HH) in the US, National Balancing Point (NBC) in the UK, netback prices of sources of LNG supply for Japan, and netback price of Indian imports of LNG at well head of exporting countries.

The weighted average of two sets of prices—HH in the US & NBC in the UK and netback from LNG exports to Japan and India—would be the price of domestically produced gas. It will be a daunting task, if not impossible, to determine the netback from LNG exports to Japan and India. It is also doubtful whether international prices in the US and the UK would be relevant to Indian situation.

Even so, imported gas being only 20% of total gas supply in India, how can international price serve as a credible reference point? Nonetheless, the committee has given some basis as against none at present. (Under PSC, operators are expected to discover prices by inviting competitive bids from potential customers. However, this was ignored when the EGoM fixed the price in 2007.)

The basis will be reviewed after five years, by which time the committee expects the market for gas in India will be sufficiently developed and the infrastructure for supply, transportation and distribution will be in place.

The formula yields a price of $8 per million British thermal unit (mmBtu) versus the current rate of $4.2 per mmBtu for most of gas produced in country. On a landed cost basis, the increase works out to $4 per mmBtu.

This will increase the cost of producing urea by about $100 per tonne (25 mmBtu for a tonne) or R5,500. On production of 17.6 million tonnes from gas-based plants, industry will incur an extra cost of R10,000 crore.

In the view of control on MRP at a low level and unwillingness of the government to increase price even ‘marginally’, it will have to give that much additional subsidy to manufacturers. But, where is the money?

The budget allocation

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