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Ideas caFE: Should govt review the Rangarajan gas price formula?

Jun 24 2014, 02:16 IST
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SummarySome argue that the gas price hike decision has been taken to help only large corporations such as RIL. But not revising prices would mean going back on the terms of the production sharing contract and would also hinder gas production further

A review of the Rangarajan Committee formula on the price of domestic natural gas (DNG) has been hinted. The focus of this piece is on DNG produced under production sharing contracts (PSCs), which dictate exploration, production, sale and share of government revenue.

There is a contractual obligation to sell DNG at an armís-length, market-determined price. PSC dictates that DNG can be sold only domestically and the price should not be tweaked to the benefit of either party to the contract. Thoughts like cost-plus or percentage increase over a base price have no validity for price of the gas produced under PSC. Such aim is void ab initio and cannot form the objective of any review.

The gas production companies had expected a rational price to be discovered. The last price discovered for a large pipeline-connected discovery has a saddle point around $15. Anything less is a loss to the producer/seller.

Any review that upholds the terms of the contract is likely to lead to a higher price. A sovereign-directed low price shall violate the sanctity of the contract. By entering into commercial contracts, the sovereign accepts some obligations and limitations on its unfettered rights. Even the Supreme Court has held that while the government is the owner of the minerals, it still needs to yield to the terms of the contract.

Globally, the number of expert players in E&P is small. Participants are clued in on the contract administration in various countries. Violation of contract shall kill the participation in NELP X and the following rounds. The repercussions are likely to flow to all contractual participation of overseas companies in many fields.

Besides, reviews generally take a lot of time, something that the industry canít afford. A review means a long animated suspension and uncertainty for the industry. The delay and price uncertainty shall imply suspension of developments of all new projects that have become commercial on the basis of prices higher than $4.20. Many existing sales agreements have already expired. In this Ďcommercial voidí, companies could rightly stop supplies on contract basis. They may shift to spot-deal basis which maybe far more expensive and erratic for buyers, or suspend production. The exploration companies may also suspend work till clarifications are available on the way forward.

It is well known that most of 100-plus discoveries made during last many years have not been developed in the absence of commercially viable price. Can India afford it? Isnít

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