Narendra Modi govt deregulates diesel, approves new gas price formula

Written by fe Bureau | New Delhi | Updated: Oct 19 2014, 13:35pm hrs
OilGovernment deregulated diesel price, though weeks after the under-recovery on the fuel vanished and turned to ?over-recoveries?, and announced a hike in the price of natural gas, which analysts said was inadequate to lure investors. (Reuters)
With assembly elections in Maharashta and Haryana behind it, the Narendra Modi government on Saturday took key economic decisions hanging fire for long. It deregulated diesel price, though weeks after the under-recovery on the fuel vanished and turned to over-recoveries, and announced a hike in the price of natural gas, which analysts said was inadequate to lure investors.

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The decontrol of diesel, helped by decline in global crude oil prices and the monthly price hikes for diesel since January 2013 led to a 6% immediate reduction in the auto fuels price and would yield significant savings on subsidy on it this year which ballooned in recent years to last years R63,000 crore, and remove the subsidy altogether for the future years.

The government, however, disappointed investors in hydrocarbon sector by announcing just 36% increase for domestically priced gas to $5.61/mmBtu after replacing a formula suggested by a high-level panel in the UPA regime, which would have resulted in a 100% price hike for the relatively benign fuel and given the much-needed impetus to its exploration and production.

The new gas price will be effective from November 1, will be revised bi-annually and would be on gross calorific value basis, which experts said would make the price hike a bit sharper.

Though the government said all future discoveries in ultra deepwater, deepwater and high-pressure-high-temperature areas would be given a premium on price, the industry remained worried that the finance ministry will have the discretion on allowing an extra price and deciding the extent of such premium on a case-by-case basis.

The government said roughly 80% of the additional revenue due to revision in gas price will go to the state-run oil companies, while its own extra gain on account of higher royalty, profit petroleum and taxes would be an annual R3,800 crore.

The revised price will be applicable for all fields given to ONGC and OIL on nomination, NELP and pre-NELP blocks where production sharing contract provides for government approval of gas prices and CBM (coal bed methane) blocks.

Diesel and gas...

However, for Reliance Industries, which is engaged in an arbitration with the government for the alleged under-production from KGD 6 block (D1, D3 discoveries), the current price of $4.2/mmBTu would continue and the difference between this and the new price would be credited to gas pool account with state-run GAIL which would be appropriated later as per the arbitration award.

KG D6 output should have been 80 mmscmd but is languishing at less than 8 mmscmd. The Rangarajan formula was tweaked by the present governmentit removed both the Japanese and Indian LNG import components in the earlier formula, brought in the Alberta Gas Reference price in place of Henry Hub Prices for Canadian consumption, and reckoned Russian actual price in place of National Balancing Point price for the Russian consumption.

An associated benefit of the diesel price deregulation is that now that theres no subsidies on petrol and diesel, private firms like Essar and Reliance can now roll out their marketing outletsin RILs case, the outlets were already there but were shut down years ago as the subsidy burden got oppressive.

For the record, state-run explorers welcomed the move. ONGC Group chairman DK Sarraf told FE that the new gas pricing brought transparency and would help in accelerating production of hydrocarbon in the country. About R6,200 crore will be added to ONGCs topline as a result, boosting the capex plans of the firm, which is also getting some relief from the subsidy burden.

However, ONGC has fields such as in the Mahanadi basin that requires a gas price of more than $10/mmBtu. Sarraf said that the sector is complex but he hopes that government would put up a policy regime that would make it possible to monetise such discoveries too.

Every dollar increase in gas price will lead to a R1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7% of the nations power generation capacity based on gas). Also, there would be a minimum R2.81 per kg increase in CNG price and a R1.89 per standard cubic metre hike in piped cooking gas. However, Indraprastha Gas Limited, which supplies CNG and PNG, in the national capital and vicinity said it may not pass on the price hike to consumers. The government will absorb some price hike in case of city gas and ask states to remove some taxes, finance minister Arun Jaitley, who announced Saturdays Cabinet Committee on Economic Affairs (CCEA) decisions, said.

The Cabinet also decided to roll out the Direct Benefit Transfer Scheme in LPG 54 districts on a mission-mode from mid-November, 2014 and in rest of country from January 2015. In addition to Aadhaar-based platform, direct subsidy would be provided to consumers who have a bank account, while the current regime where specified number of LPG cylinders are given at subsidised prices would continue for some time for those without Aadhaar and bank accounts, Jaitley said. He said that 6.2 crore bank accounts have been opened under Jhan Dhan Yojana. The CCEA also approved the proposal for policy framework for relaxations, extensions and clarifications at the development and production stage under PSC regime for early monetisation of hydrocarbon discoveries.