If the recommendations of C. Rangarajan Panel find their way then the domestically produced gas price in the country would hover around $7-8/mmBtu at the current rate. This would be almost double that of the current rate.
This would also result in higher subsidy outgo, as the input costs for fertiliser and gas-based power plants will go up, those tracking the industry say.
But, the recommendations are close to what the petroleum industry has been seeking.
April 1, 2014, is when gas price 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.
New formula
The panel has suggested a gas pricing formula 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 and Japan Custom Cleared (on net-back basis, since it is an importer).
Arm's length price
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 report has said.
In its recently submitted report, the panel looking into production sharing contract in petroleum sector, has said that the proposed policy would provide for estimation of an unbiased arm’s length price for the Indian producer.
The relevant price in this context would be the price producers receive in other gas-producing destinations, an official statement said.
Average of two prices
One price would be derived from the volume-weighted net-back price to producers at the exporting country well-head for Indian imports for the trailing 12 months.
The other would be the volume-weighted price of US’s Henry Hub, UK's NBP and Japan Custom Cleared (on net-back basis, since it is an importer) prices for the trailing 12 months.
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, it said.
At present, the PSC provides for arm’s length pricing and prior Government approval of the formula or basis for gas pricing, subject to policy on natural gas pricing.
Other recommendations
Fiscal terms under PSC: In its report, the committee has opined that since cost recovery is at the root of the problems experienced so far, it is proposed to dispense with it, in favour of sharing of the overall revenue of the contractor, without setting off any costs.
The Directorate General of Hydrocarbons had reportedly advocated a production-linked payment system, where oil companies would have to pay the Government an agreed amount depending on the level of output, and not on the investment in the exploration block.
In the present fiscal model, the contractor first recovers its expenditure before sharing profit.
Production-linked payment
The production-linked payment is said to be more transparent and will have less intervention in routine exploration and development activities.
“The share will be determined through a competitive bid process for future PSCs. The bids will be made in a bid matrix, in which the bidder will offer different percentage revenue shares for different levels of production and price levels,” the report says.
The bids will have to be progressive with respect to both volume of production and price level.
This will ensure that as the contractor earns more, the Government gets progressively higher revenue, and will also safeguard Government interest in case of a windfall arising from a price surge or a surprise geological find.
Tax Holiday : The committee has also recommended that an extended tax holiday of 10 years against 7 years already available for all exploration blocks, be granted for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500 metres, since the cost of a single well can be as high as $150 million.
Extension : Further, the committee has recommended extending the timeframe for exploration in future PSCs for frontier, deep-water (offshore, at more than 400 m depth) and ultra-deep-water (offshore, at more than 1,500 m depth) blocks from eight years currently to 10 years.
Other important suggestions
Fiscal terms under PSC: In its report, the committee has opined that since cost recovery is at the root of the problems experienced so far, it is proposed to dispense with it, in favour of sharing of the overall revenue of the contractor, without setting off any costs.
The Directorate General of Hydrocarbons had reportedly advocated a productionlinked payment system, where oil companies would have to pay the Government an agreed amount depending on the level of output, and not on the investment in the exploration block. In the present fiscal model, the contractor first recovers its expenditure before sharing profit.
Production-linked payment: The productionlinked payment is said to be more transparent and will have less intervention in routine exploration and development activities. “The share will be determined through a competitive bid process for future PSCs. The bids will be made in a bid matrix, in which the bidder will offer different percentage revenue shares for different levels of production and price levels,” the report says.
The bids will have to be progressive with respect to both volume of production and price level. This will ensure that as the contractor earns more, the Government gets progressively higher revenue, and will also safeguard Government interest in case of a windfall arising from a price surge or a surprise geological find.
Tax Holiday: The committee has also recommended that an extended tax holiday of 10 years against seven years already available for all exploration blocks, be granted for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500 metres, since the cost of a single well can be as high as $150 million.
Extension: Further, the committee has recommended extending the timeframe for exploration in future PSCs for frontier, deep-water (offshore, at more than 400 metre depth) and ultra-deep-water (offshore, at more than 1,500 metre depth) blocks from eight years currently to 10 years