Domestically produced natural gas being sold in the range of $4.2-5.7/mmBtu may become a thing of the past, if the ministerial panel on gas pricing considers the Petroleum & Natural Gas Ministry’s proposal.
The Ministry, based on the recommendations of the C. Rangarajan Panel, has proposed natural gas pricing guidelines which, if accepted, would result in almost doubling of prices.
Domestically produced gas price in the country would then be around $7-8/mmBtu at the current rate.
Observers say this would result in higher subsidy outgo, as the input costs for fertiliser plants will go up. The costs of power and other products will also rise, as input costs for gas-based power plants, city gas distribution sector (piped gas for households and CNG for transport), ceramic and glass, as well as sponge iron and steel, will also increase.
However, this would bring some respite to both public and private sector gas producers such as ONGC, Oil India and Reliance Industries among others.
In its draft proposal for the Empowered Group of Ministers, the Ministry is understood to have said that the objective was to ensure that domestically produced natural gas prices were fixed in a fair manner and should also result in incentivising production.
It said the Government was conscious of the fact that gas-on-gas competition was the ultimate goal for pricing of natural gas. But, in the absence of a free global gas market, the guidelines would serve to provide the best alternative to arm’s length market-driven prices.
The Ministry has said that it would serve the twin purposes of protecting the consumer and fair-play to the producers.
The Rangarajan panel has suggested a pricing formula for ‘future’ contracts based on the average of two prices — price at other producing destinations and the volume-weighted price of US’s Henry Hub, UK’s NBP (National Balancing Point) and Japan Custom Cleared (on net-back basis, since it is an importer) trailing for 12 months.
The arm’s length price thus computed as the average of the two price estimates would apply equally to all sectors, regardless of their prioritisation for supply under the Gas Utilisation Policy, the Rangarajan report has said.
According to the Petroleum Ministry’s proposal, the guidelines will be applicable to all domestically produced natural gas irrespective of the source – whether conventional, shale or CBM.
The suggested formula will apply to pricing decisions made in future, and can be reviewed after five years when the possibility of pricing based on direct gas-on-gas competition may be assessed.
If the proposal gets the mandatory approval, then the new price for Reliance Industries-operated D6 block will also be based on this formula.
April 1, 2014, is when gas sold from Reliance Industries-operated D6 block is to get a new price. Gas from the block is currently sold at $4.2/mmBtu (landfall point).
Reliance and its partners in the block BP and Niko Resources have been seeking a review of price. The proposed price, according to them, should be in the range of $13/mmBtu.