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The buck on Coal Bed Methane (CBM) gas pricing stops with C. Rangarajan, it seems, with both the Petroleum Ministry and Reliance Industries Ltd (RIL) knocking at his door.
The Ministry’s argument is that the net effect of the formula adopted by RIL for its block in Madhya Pradesh will increase subsidy outgo for the Government, while not generating much revenue. This is opposed by RIL.
Review of contracts
The Petroleum Ministry has referred all gas pricing issues to the Rangarajan committee, set up to review production sharing contracts. CBM gas is a form of natural gas extracted from coal seams.
The company, in its presentation before the panel, protested against the Ministry’s views on the grounds that it restricts the price discovery mechanism — the process of determining the price of an asset through buyer-seller interaction.
RIL said while the Government’s right to allocate gas according to its priorities is acceptable, the restriction on the price discovery mechanism violates the principle of arms-length sales mandated in the CBM contracts.
The guidelines require the contractor to undertake restricted price discovery from only pre-identified priority sector customers, RIL said, adding that it has submitted a representation opposing this restriction.
According to the CBM contract, the operator is required to discover the market-determined gas price amongst identified priority sector/customers on the basis of the arms-length principle. CBM is to be sold and valued on the basis of competitive arms-length in the region for similar sales under similar conditions.
DifferenT prices
The Government approves the formula/basis on which CBM price shall be determined for valuation of the gas produced from there.
Today, natural gas from various sources in the country is sold at different prices. According to the RIL proposal, its CBM gas price comes close to $12.9/mmBtu with crude at $100 a barrel.
RIL said it had submitted the pricing proposal in September 2011 to supply this gas along the Hazira-Vijaipur-Jagdishpur (flowing from West-Central-North) pipeline at prices linked to import parity.
Open bids
The proposal was also validated by inviting open bids from all consumers, including those in priority sectors, it said, adding that all relevant ministries and State Governments were requested to advise priority sector consumers in the bidding.
The company received 71 bids for 90 mmscmd of gas. It said most of the fertiliser (a priority sector identified by the Government) consumers submitted ‘non-serious’ price bids.
The result of the bids was submitted to the Petroleum Ministry in February and, in April, the Directorate-General of Hydrocarbons said it was in conformity with the provisions of the contract.
But the proposal was not approved by the Government on the ground that a higher gas price would increase the subsidy burden.
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