IN what could help revive sagging investor interest in India’s hydrocarbon sector, the Cabinet Committee on Economic Affairs on Thursday resolved to allow Reliance Industries (RIL) to price gas from the KG-D6 field as per the Rangarajan formula from April 1 next year.
This is subject to the company giving a bank guarantee — covering the difference between the current gas price of $ 4.2/per million British thermal units (mmBtu) and the new formula rate — which can be encashed in case it is proved later that hoarding — and not any geological surprise, as claimed by the company — has resulted in the slippage in KG-D6 output.
The Rangarajan formula would be notified in a week.
The formula is for gas pricing for five years starting FY15. At current rates of the reference prices, the gas price based on this formula would be around $7/mmBtu. It is hoped that the new formula could eventually pave the way for market-determined pricing of gas.
The formula was approved by the Cabinet in June but uncertainty prevailed over its implementation due to the wrangle over alleged short-supply of gas by the company after the finance ministry put its foot down, saying the company ought to be penalised for producing gas less than mandated in the approved plan. The oil ministry subsequently proposed to secure bank guarantees from the company.
The government said that details of the bank guarantee including its periodicity would be worked out by January 2014, taking into account the law ministry’s views. According to the government, the short-supply of gas at KG-D6 so far has been around 1 trillion cubic feet.
The unbiased arm’s length price proposed by the Rangarajan panel is the average of two weighted averages. One is that of the prices defined by taking the cost of LNG imports into India under long-term contracts
and excluding charges such as transportation which would denote the price at the point of production in exporting countries.
The other is that of prices at three major gas trading points — the price at Henry Hub in the US, the price at