Producers of natural gas in the country will get to sell up to half their output from post-November 2014 discoveries at market prices, if the finance ministry concurs with a proposal from the petroleum ministry. Seeking to fulfil a promise to hydrocarbon explorers that a premium over the government-fixed, formula-based gas price — which is $5.18 per million British thermal units (mBtu) now — would be given to them to encourage production at geologically difficult areas, the petroleum ministry has proposed that 20-50% of the gas volumes from such areas may be allowed to sold at market rates. The firms could discover the market prices via auction.
When contacted, petroleum minister Dharmendra Pradhan said a proposal on the incentives for gas production from difficult areas has been sent to the finance ministry, which would take a final call on the matter. The finance ministry’s consent is required because gas pricing has implications for the government’s revenue.
The move signals a gradual movement to market-linked pricing, which has been favoured by various expert committees — including the ones headed by Vijay Kelkar and C Rangarajan.
However, analysts noted that given the control/regulation on output prices of many of the user industries like power and fertiliser and the tepid demand scenario, the pricing power of the gas producers could remain constrained in the short run.
Although the exact share of production to be earmarked for market-linked pricing (while the balance is sold at government-fixed prices) for different types of fields could not be immediately ascertained, sources said that the ‘difficult areas’ have been categorised into five groups, and the volume for market pricing would vary from 20-50%. The more difficult a field, the larger its share of sales in the open market. Difficult fields include high-temperature/high-pressure areas as also deepwater and ultra-deepwater ones.
According to industry watchers, the premium pricing would bring some relief to state-run and private oil and gas explorers such as ONGC, Reliance Industries (RIL), Cairn India, BP, Oil India, and Gujarat State Petroleum Corporation (GSPC), among others, who have been seeking market-determined price for the natural gas for long.
RIL and BP, sources said, have urged the petroleum ministry to relax the Cabinet Committee on Economic Affairs decision of October 18 last year to allow the premium pricing methodology for discoveries made prior to November 2014 as well.
The oil ministry’s move comes at a time the government is planning a shift to a revenue-sharing regime, in which the companies will have to indicate the quantity of oil and gas they will share with the government at various stages of production along with the rates. In the proposed system, the government’s remuneration is de-linked from the quantum of investment made in developing the block and extracting the hydrocarbons. Under the present production-sharing contract (PSC) system, applicable for blocks auctioned under all the previous NELP rounds, an explorer gets to recover costs incurred during the exploration cycle, before sharing profits with the government. The government also charges royalty and cess on hyrocarbon production — in the case of onshore fields the proceeds go the state governments, and the Centre gets the revenue from offshore fields.
The price of domestic natural gas, which was hiked in November last year by the NDA government, was reduced by 7.6% to $5.18 per mBtu effective April 1, as the relevant global benchmark prices remained subdued in the second half of 2014. The Cabinet on October 18 last year approved the new gas price formula, after tweaking the Rangarajan formula approved by the UPA government in June 2013.
According to consultancy firm McKinsey, India will be producing 47 million metric standard cubic metres per day (mmscmd) from “challenging fields” in the next two to five years. The country’s total gas output is around 90 mmscmd at present. Globally, countries such as the US, Russia, Malaysia, China, Canada and Colombia offer incentives for drilling of hydrocarbons from difficult reserves. The incentives include income tax breaks, investment allowance, lower production tax and pricing returns.