Review Rangarajan formula on gas pricing: A heavy price to pay

Jul 15 2014, 11:59 IST
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SummaryThe government’s move to review Rangarajan formula on gas pricing will erode the confidence of the E&P companies looking to invest in India

While there is much debate on natural gas pricing and an appropriate formula to arrive at it, the need of the hour is to quickly fill up the void that exists today in the production sharing contracts under which private- and public-sector oil companies produce gas. Arriving at a market-determined price would help continue sales, carry out approved development and make existing and likely discoveries attractive for exploration companies. In 2012, the Rangarajan committee came up with a formula to raise prices. However, sellers considered the Rangarajan formula price as a low one that did not reflect the true market price. Buyers considered it to be too high. Following the controversy, the new government announced in June that it will review the formula.

Does the Rangarajan formula fix a high price for gas?

The Rangarajan price is a proxy for the average global price. Being the global average, it is neither high nor low. The gas prices vary from low in the energy-rich countries to high in those that are energy-deficient. In some places, gas is an economically negative nuisance and is burnt to make the production of oil viable. It is available for sale at near-zero price if you bear the expenses to evacuate and transport it. However, it is a difficult material to transport.

Gas markets can be stranded with expensive and complex transport issues. There is no single global price as yet, though one is likely to emerge with increasing liquified natural gas trade.

Why is a review of the formula unwarranted at this juncture?

A meaningful review has to consider many complex factors. These include contractual issues with producers; demand-supply balance, artificially controlled by the government at the moment; the budget deficit, because any replacement price impacts areas like agriculture and power where the government has social obligations and subsidies that are linked to the budget.

During the period of the review, the contractual rights of the oil producers will remain violated. Further development of gas fields shall stop and the new bidding rounds will go abegging as already seen in the last couple of NELP rounds. Already, nearly 100 discoveries remain undeveloped for want of commercial price. A complete and proper review at this stage is impracticable. Any APM-like decision shall have all the above negative implications and some more. The negative perception about India’s reliability for doing business shall impact areas beyond oil and gas.

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