Govt likely to set natural gas pricing policy,floor price close to Rangarajan formula

Cutting through the range of options made by ministries the government is expected

Cutting through the range of options made by ministries the government is expected to set a price policy for natural gas which could be initially quite close to the Rangarajan panel set $6.775 per mmbtu. It will,however,be changed every quarter,according to a Cabinet note.

The price,however,does not build in any additional benefit based on import parity for gas exploration companies as was alleged recently by CPI MP Gurudas Dasgupta. The allegations were rebutted by petroleum minister Veerappa Moily in a detailed press note.

The key natural gas producers in India are Reliance Industries (RIL),ONGC and Oil India. Gujarat State Petroleum Corporation is also a large producer and has been advocating a rate indexed to imported gas prices.

The Cabinet note however acknowledges that energy pricing is an economically important but also politically sensitive issue (in India). It goes on to add while political sensitivity is self evident,the economic role of rational energy pricing is not adequately appreciated.

This will be the second critical pricing decision on natural resources the government plans to get done,after coal. A decision on the new price mechanism for natural gas was deferred on Friday by the Cabinet Committee on Economic Affairs to this week. In the same meeting however it was decided to allow cost plus pricing for imported coal to down stream power companies.

As the chart shows,the power ministry and natural gas based power producers have suggested a similar cost-based pricing principle for this sector too. But the note has ignored it.

The power ministry has calculated the cost price price will be $4.14,lower than the $4.20 for instance at which gas producing companies are selling the gas now. Concerns on how the gas pricing would go is weighing on RIL stock,a note from JP Morgan has said.

The Cabinet note,which has been perused by The

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Indian Express suggests framing a gas pricing policy that will allow for changes in price every quarter. It will be used through the remaining years of the 12th Five Year Plan. At the end of the plan,the prices will switch over to the Vijay Kelkar formula for market based pricing.

The price will be a sum of the average of the global mean of the prices and the cost of gas imports by all Indian importers,divided by two.

The note argues that since each gas exporting country faces competition there is no reason to suppose that India faces any bias of being overcharged or undercharged. Added to the overall average of global prices such an average can be taken as an economically appropriate estimate of the arms length competitive price applicable for India.

The guidelines will be applicable to all natural gas produced domestically including shale and coal bed methane gas with effect from April 1,2014. The only exceptions will be cases where prices have been fixed contractually for any period,till it lapses.

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This means gas producers will find it difficult to change the price they charge for contracted amount. For instance for their Kawas and Gandhar power plants NTPC has a contract with ONGC till 2021.