Domestic oil and gas producers such as Reliance Industries, BP and ONGC want the Petroleum and Natural Gas Ministry to wait for the Kelkar panel report before adopting the C. Rangarajan Committee’s suggestions on gas pricing and cost recovery.
The formula proposed by the Rangarajan panel comprises too many variables that are linked to the US/European markets and are not under the control of domestic investors. It is also influenced by demand in those countries/regions rather than the Indian demand picture, say the producers.
Align with demand
If the Rangarajan panel’s suggestions are accepted, the price of gas produced domestically would double, at almost $8/mmBtu. But it will still be lower than the new price being sought by Reliance and its partners in the D6 block — BP and Niko Resources — of close to $12.9/mmBtu from gas to be sold from April 1, 2014.
The producers, who met the Petroleum Secretary, Vivek Rae, said the formula should be such that it is compliant with the production sharing contract, in sync with Indian demand/supply dynamics, and not too complex to implement (data is easily available from transparent sources). The producers, through the Confederation of Indian Industry, have also requested that the Ministry should wait for the Kelkar report. The Petroleum Ministry has been hinting at approaching the Empowered Group of Ministers soon to consider the gas pricing formula.
Pricing basis
On March 18, the Government announced the constitution of a committee headed by Vijay Kelkar to prepare a roadmap for enhancing domestic production of oil and gas by 2030. The Committee has to submit its report to the Government within six months.
The Ragarajan panel has suggested a pricing formula based on the average of two prices — price at other producing destinations and the volume-weighted price of the US’ Henry Hub, the UK’s NBP and Japan Custom Cleared (on net-back basis, as it is an importer). Both Henry Hub and NBP (National Balancing Point) are traded prices.
Today, the NPB is around $11.5/mmBtu, Henry Hub $4/mmBtu, JCC linked about $15/mmBtu, spot LNG $18-19/mmBtu, and the long-term contract gas at around $11.7/mmBtu. The producer price, according to estimates, would be close to $11/mmBtu. Domestically produced gas is priced at $4.2-$5.7/mmBtu.