The Telegraph
Monday , June 2 , 2014
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New team studies gas price options

New Delhi, June 1: The new government is looking at all aspects of the gas price controversy, including a relook at the price formula, to resolve the long standing conflict that continues to dampen investor sentiment.

Petroleum minister Dharmendra Pradhan, who was recently briefed on the pricing issue by the senior officials of the ministry, has asked them to come up with all the perspectives on the issue.

“The minister has asked the officials to make presentation on different aspects of the issue, pending cases, including the arbitration notice issued by Reliance Industries, and issues concerning the Rangarajan formula,” officials said.

Indications are that natural gas prices will almost double to around $8.34 per million British thermal unit (mBtu) from $4.2 per mBtu based on the Rangarajan formula.

Officials said the minister had asked them to find out whether the formula could be tweaked to benefit both the explorers and consumers.

According to the formula, worked out by a panel headed by the former chief of the Prime Minister’s Economic Advisory Council, C. Rangarajan, domestic gas will be priced at an average of the price of imported LNG and international hub rates.

The fertiliser sector has also raised questions about the formula and threatened to challenge it. “The price of domestic gas should not be linked to imported LNG price. The formula for the determination of price is very complex, with basic data not available in the public domain. Therefore, the price so determined will invariably be challenged,” Satish Chander, director-general of the Fertiliser Association of India, said.

In a letter to the fertiliser ministry, Chander said domestic gas price “should be in rupees, not dollars. In fact, domestic gas price in dollars was introduced only five years ago; consequently, the price of domestic gas is rising continuously in rupee terms. The proposed massive rise in gas price will increase the subsidy outgo of urea sales by more than Rs 10,000 crore per annum”.

Power sector woes

The power sector is also not happy with the formula. According to some estimates, the average cost of gas-fired electricity will go up to Rs 6-7 a unit from Rs 3.50-5 per unit, making electricity unaffordable to state electricity boards, which sell to the ultimate consumers.

“There’s a view gas prices above $6 aren’t viable for power plants. If prices double, the plants will have no buyers and will have to shut,” said Ashok Khurana, director-general of the Association of Power Producers, which represents non-state generators such as Tata Power, Adani Power and Reliance Power.

Besides, Reliance Industries has issued an arbitration notice to the oil ministry seeking the implementation of the new gas price retrospectively from April.

The oil ministry has sought the view of the law ministry on whether retrospective implementation of the higher price can be permitted under the production-sharing contract. It has also sought the finance ministry’s view as the latter will have to compensate fertiliser firms if the gas price is notified from April 1.