The Telegraph
Tuesday , December 25 , 2012
Since 1st March, 1999
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Panel formula to jack up gas rates

New Delhi, Dec. 24: The C. Rangarajan Committee on gas pricing, which has submitted its report to the Prime Minister’s Office on December 20, may have favoured a formula which can see gas prices rising.

Though officials refused to disclose details, sources said the price of gas could go up to $8 per million British thermal unit (mBtu) compared with $4.2 per mBtu now — under a formula that uses the weighted average of the prices in key markets.

However, there were hedges to the formula in the form of price options under different cost situations; therefore, if costs claimed by oil companies were not accepted, the price could well remain locked at current levels.

Reliance Industries Limited has already demanded that the price of gas from its Krishna-Godavari basin gasfields should be raised to $14 a unit, up from a government set price of $4.2 per mBtu. The oil ministry had opposed this new price, pointing out that gas prices are fixed till 2014. Opposition leaders and anti-graft activists had supported the oil ministry’s initial stand.

The panel is believed to have suggested the pricing of natural gas based on weighted average of the fuel price in North America, Europe and Japan markets as well as imported liquefied natural gas (LNG).

Among other recommendations, the panel has suggested changing future oil and gas contracts to end the current practice of firms first recovering their costs from the sale of oil and gas before sharing profits with the government. This had been criticised by the Comptroller and Auditor General of India.

Explorers would have to quote bids for the government’s share of production, after the payment of royalty. Cost recovery has often led to disputes between the explorer and the government, including a face-off between Reliance and the Director General of Hydrocarbons over the Krishna Godavari (KG) gasfields.

The cost recovery method was criticised by the CAG and many experts who felt it could lead to goldplating by oil and gas producers in order to claim set-offs and higher gas prices.

The panel was appointed to suggest changes in existing oil and gas exploration contracts with energy firms to minimise monitoring of expenditure, fix a system to determine domestically produced natural gas price and modify existing profit-sharing mechanism, which, according to the national auditor CAG, favoured private energy firms.

If the Rangarajan panel has actually suggested a firm basis for the pricing of gas, it would tantamount to the government taking up the role of fixing of the price as well.

The government currently fixes users of the fuel and only approves a price discovered by companies.

Sources said the committee felt that in the existing contract system with liberal cost recovery provisions, the government share comes at a relatively later stage of production. As a result, the government bears a major part of the “cost risks” during the project life-cycle.

Sources said it was unclear if the suggestion of the panel could override the arms length price discovery set out in the production sharing contracts signed by companies.

Under the current contracts, a contractor is required to discover an arms-length price of gas by calling bids from prospective users.

Besides Rangarajan, the panel has former Supreme Court Judge Jagannadha Rao, Planning Commission member B.K. Chaturvedi, Prof. Ramprasad Sengupta, former bureaucrat J.M. Mauskar and former ONGC Videsh managing director Joeman Thomas as members.