Govt bites the bullet: Gas prices to double from April 1 next year

New Delhi: Biting the bullet, the governmentapproved near doubling of natural gas prices to $8.4from April 1 next year, a move which will result in rise inpower tariff, urea cost and CNG prices.

This will be the first revision in gas prices in 3 years.

The Cabinet Committee on Economic Affairs (CCEA) headedby Prime Minister Manmohan Singh approved Oil Ministry’sproposal to price all domestically produced natural gas as pera complex formula suggested by a panel headed by PrimeMinister’s economic advisor C Rangarajan, a top source told_PTI._

The new price will apply uniformly to all producers, beit state-owned firms like Oil and Natural Gas Corp (ONGC) orprivate sector Reliance Industries. While it was previouslysaid the new rates would apply to regulated or APM gasproduced by firms like ONGC immediately, the pricing as perRangarajan formula will come into effect from April 1, 2014,just when RIL’s KGD6 formula of USD 4.2/mmBtu runs out.

The Rangarajan formula would be applicable for fiveyears.

The Rangarajan formula uses long-term and spot liquid gas(LNG) import contracts as well as international tradingbenchmarks to arrive at a competitive price for India.

While the Rangarajan panel had recommended revisingdomestic gas prices every month based, the Oil Ministry

changed it to a quarterly revision.Though the average of of the two currently comes to USD6.775, the price of gas in April next year when theseguidelines will come into effect would be around USD 8.42 andover USD 10 in the following year.

This is because Petronet’sdeal with Qatar’s RasGas (India’s only functional long-termLNG contract) has a price-cap which lifts in January 2014,linking gas prices fully with crude.

While RIL’s KG-D6 gas price was fixed in 2007 at USD4.205 per mmBtu for first five years of production, APM gas rates were last revised in June 2010 when prices were raisedto USD 4.2 from USD 1.79. RIL began production from its eastern offshore KG-D6 field in April 2009.

Administered Price Mechanism (APM) gas constitutes about60 per cent of current domestic production of about 110 million standard cubic metres per day. RIL produces about 14mmscmd.

The revision in prices was bitterly opposed by userministries of power and fertiliser as well as opposition Left parties who saw the move as helping RIL.

The Oil Ministry has reasoned that the increase in gasprice was need to incentivise exploration while also resulting in higher revenues to the government.Every dollar increase in gas price would result in USD128.5 million (Rs 707 crore) in additional royalty and profitpetroleum.

However, Power Ministry had opposed any hike sayingelectricity generation at any price of over USD 5 was economically unviable. Also, it had questioned the need toprice the fuel in US dollars as any depreciation in the Indian currency would further add to the strain on the consumers.

The variable cost of generating electricity would bearound Rs 5.40 per kilowatt hour (per unit) at new gas price, taking the total cost of generation to Rs 6.40 per unit. Thiscompares to current cost of Rs 2.93 a unit.

The outgo for every USD 1 increase in gas price will beup to USD 1.138 billion (Rs 6,260 crore). Outgo for fertiliser sector due to USD 1 increase in gas price will be USD 406million (Rs 2,233 crore).Quoting a report of global consultants IHS-CERA,Macquarie Equities Research said India’s producible gasreserves could rise two-founds by 55-91 trillion cubic feet atgas price of USd 10-12/MMBtu.

“We believe India’s gas production could rise three-fold,alleviating the largest component of India’s current account deficit, which currently stands at 5.3 per cent,” it said.

PTI