OilMin proposes doubling gas price to $8-8.5 per mmBtu

New Delhi: Oil Ministry has moved a Cabinet note for nearly doubling the price of natural gas produced by state-owned ONGC and OIL to $8-8.5 per million British thermal unit in the current year itself and for Reliance Industries from April 2014.

The Ministry in a draft Cabinet note proposed accepting in toto the Rangarajan Committee recommendation of pricing domestically produced natural gas at an average of international hub prices and cost of imported LNG instead of present mechanism of market discovery.

[caption id=“attachment_599731” align=“alignleft” width=“380”]  The panel had addressed key issues on “gas price mechanism” and created “an investment enabling environment”. Reuters[/caption]

Sources said ministry wants the pricing formula proposed by the panel to apply to all forms of natural gas - conventional, shale and coal-bed methane (CBM). Also, the price determined shall be applicable to all consuming sectors uniformly.

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It, they said, wanted the new pricing guidelines to apply from 2013 itself on all domestically produced gas barring cases where it is either governed by a definite formula prescribed in the Production Sharing Contract (PSC) or the government had previously fixed a tenure for the same.

This essentially meant that RIL would get the new price only from April 1, 2014 upon expiry of the fixed five-year term of current rate of $4.205 per million British thermal unit. State-owned Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) can, however, get the new rates this year itself for gas they produce from fields given to them on nomination basis by the government. Gas from nominated fields, called APM gas, is currently priced at $4.2 per mmBtu.

The Rangarajan panel suggested rates may also not apply to BG Group-operated Panna/Mukta and Tapti fields in the western offshore as the current rates of $5.57-5.73 per mmBtu for the fuel produced from these are derived from a pre-defined formula detailed in the PSC.

However, Cairn India’s eastern offshore Ravva gas, which is currently priced at $3.5-4.3 per mmBtu, may be revised as per the committee recommendations. Sources said the ministry said the Rangarajan panel report needs to be accepted so that domestically produced natural gas prices are fixed in a fair manner and in a way that incentivises production.

The panel had suggested taking a weighted average of the US, Europe and Japanese gas hubs or market price and then averaging it with the net imported price of liquefied natural gas (LNG) to give sale price of domestically produced gas.

Taking last year’s publicly available consumption numbers and the prevailing price of gas in the three markets, the formula suggested by the Rangarajan committee gives $8-8.5 per mmBtu as the price of domestic gas.RIL, which had been engaged in protracted wrangling with the Oil Ministry on pricing of natural gas from its eastern offshore KG-D6 field, last week said there was “positive traction in domestic exploration and production business environment with the submission of Rangarajan Committee Report”.

The panel had addressed key issues on “gas price mechanism” and created “an investment enabling environment”, RIL said in investor presentation on its October-December quarter results.

RIL has since been seeking a price of almost $13 per mmBtu for gas produced from KG-D6 gas on expiry of current USD 4.2 per mmBtu price in April next year and its comments on Rangarajan Committee recommendation are being seen as its readiness to accept a lower price.

The company, which had previously stated that $4.2 was too low for monetising smaller and marginal gas finds in KG-D6 and other blocks, said the Rangarajan panel recommendation “indicates positive sign for monetisation of marginal fields”. The Rangarajan Committee suggested averaging volume-weighted price of gas at US’s Henry Hub, UK’s NBP and Japan Customs Cleared prices for the trailing 12 months with the the net price that producer got from exporting liquefied natural gas (LNG) to India on a long-term contract.

Previously, RIL had from April 2014 wanted to price KG-D6 gas at the rate India pays for importing gas in its liquid form (called LNG) on a long-term contract from Qatar. India pays 12.67 percent of the international oil rate plus $ 0.26 per mmBtu to Qatar. At $100 per barrel oil rate, this translated into a gas price of $12.93.

The panel headed by C Rangarajan-Chairman, Economic Advisory Council to the Prime Minister -also suggested gas-on-gas competition after five years and sweeping change in future exploration contracts.

The existing PSC allows a company to recover its cost, before giving the government a share in revenue earned from sale of oil and gas. Stating that cost recovery is at the root of the problems being experienced currently, the panel proposed to dispense with it in favour of sharing of the overall revenues of the contractor, without setting off any costs.

The committee has also recommended that an extended tax holiday of 10 years, as against 7 years already available for all blocks, be granted for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500 metres, since cost of a single well can be as high as $50 million.

PTI