India's new gas price formula from next year: All you need to know

India has agreed on a pricing formula for gas supply contracts with producers from April 1, 2014, when the current benchmark deal with Reliance Industries expires.

The new formula will be valid for five years and applies only to new contracts or renewals when existing ones expire. It does not apply to contracts which contain a specific formula for natural gas price indexation or fixing.

The government broadly agreed with terms suggested by a committee set up to look at production-sharing contracts for the oil and gas industry, known as the Rangarajan proposals after the name of the committee chairman.

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The main departure from the Rangarajan proposals was to review prices quarterly, rather than monthly, in an attempt to smooth volatility and allow better planning of investments.

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Here are the main points of the pricing formula:

Duration:

Five years from April 1, 2014. The date is when the current agreement with Reliance Industries for its gas from the KG Basin off India’s east coast expires. This contract had a clause linking it to global oil prices, with a maximum of $60 per barrel - well below current levels. It effectively capped domestic gas prices at $4.2 per mmBtu.

The Rangarajan committee said that after five years, “the possibility of pricing based on direct gas-to-gas competition may be assessed”.

Benchmarks:

There are two broad elements which are used for an average which will be used as an “unbiased arm’s length price” the Rangarajan committee said.

These are:

1. A price obtained by taking the cost of liquefied natural gas (LNG) imports into India under long-term contracts and removing charges such as transportation to obtain a theoretical price at the point of production in exporting countries. This is known as the netback price. The government decided not to include spot import costs. It will be a weighted average.

2. The weighted average of prices at three major gas trading points - the hub price at Henry Hub in the United States, the price at the National Balancing Point of the UK and the netback price at sources of supply for Japan.

Review Date and Timeline:

The prices will be reviewed every quarter, the government said, moving away from the monthly reviews suggested by the Rangarajan committee to reduce volatility and make it easier for investment decisions.

For both pricing elements, the formula will take the average prices for the four quarters preceding the quarter before the review. So for the quarter starting April 1, 2014, the formula will be based on the four quarters ending December 31, 2012.

Indicative Pricing:

At this stage, because the formula is based on spot prices which will change, only indicative prices are available.

For the April to June 2013 quarter, the indicative price would be $6.83 per mmBtu, a government statement said.

Reuters