India's new gas price formula post-Reliance Industries contract expiry

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New formula will be valid for 5 yrs and applies only to new contracts or renewals. (AP) New formula will be valid for 5 yrs and applies only to new contracts or renewals. (AP)
SummaryNew formula will be valid for 5 yrs and applies only to new contracts or renewals.

India has agreed on a pricing formula for gas supply contracts with producers from April 1, 2014, when the current benchmark deal with Reliance Industries expires.

The new formula will be valid for five years and applies only to new contracts or renewals when existing ones expire. It does not apply to contracts which contain a specific formula for natural gas price indexation or fixing.

The government broadly agreed with terms suggested by a committee set up to look at production-sharing contracts for the oil and gas industry, known as the Rangarajan proposals after the name of the committee chairman.

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The main departure from the Rangarajan proposals was to review prices quarterly, rather than monthly, in an attempt to smooth volatility and allow better planning of investments.

Here are the main points of the pricing formula:

DURATION

Five years from April 1, 2014. The date is when the current agreement with Reliance Industries for its gas from the KG Basin off India's east coast expires. This contract had a clause linking it to global oil prices, with a maximum of $60 per barrel - well below current levels. It effectively capped domestic gas prices at $4.2 per mmBtu.

The Rangarajan committee said that after five years, "the possibility of pricing based on direct gas-to-gas competition may be assessed".

BENCHMARKS

There are two broad elements which are used for an average which will be used as an "unbiased arm's length price" the Rangarajan committee said.

These are:

1. A price obtained by taking the cost of liquefied natural gas (LNG) imports into India under long-term contracts and removing charges such as transportation to obtain a theoretical price at the point of production in exporting countries. This is known as the netback price. The government decided not to include spot import costs. It will be a weighted average.

2. The weighted average of prices at three major gas trading points - the hub price at Henry Hub in the United States, the price at the National Balancing Point of the UK and the netback price at sources of supply for Japan.

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