On January 10, 2014, Government had notified new guidelines for pricing of domestic gas applicable from April 1, 2014 that would lead to doubling from current US$ 4.2 per mBtu. Even as EC has deferred its implementation for now, meanwhile, fertilizer industry has got another shocker.
In the gas sales purchase agreement (GSPA) for supplies from D-6 block of Krishna-Godavari (KG-D6) basin, Reliance Industries (RIL) has proposed that government fixed rate will be charged on gross calorific value (GCV) basis instead of current practice of charging on net calorific value (NCV). It also moots marketing margin of US$ 0.135 per mBtu on GCV basis.
For arriving at price applicable to all domestic gas, Rangarajan formula takes average of hub prices in USA and Europe and further averages these with net-back price of imported liquefied natural gas (LNG) in to India. The new price – to be revised quarterly – is expected to be US$ 8.2-8.4 per mBtu.
One GCV equals 0.9 NCV. Therefore, price of US$ 8.3 per mBtu on GCV basis will translate to US$ 9.22 per mBtu (8.3/0.9) on NCV basis, higher by 0.92 per mBtu. Likewise, marketing margin of US$ 0.135 per mBtu on GCV basis will become US$ 0.150 per mBtu on NCV basis (0.135/0.9), higher by 0.015 per mBtu.
Thus, fertilizer units will have to pay US$ 0.935 per mBtu extra on account of switch in the basis from NCV to GCV. Including impact of hike in price by US$ 4.1 per mBtu overall, they will have to shell out US$ 5.035 per mBtu more.
Though, RIL proposal is for supplies from KG-D6, government may not take a different view in respect of supplies from ‘other’ sources. This is because Rangarajan methodology applies to entire quantity of domestic gas and policy dispensation has to be uniform.
Taking 24 mBtu for a ton of urea, hike in gas price will increase production cost by US$ 120.8 (24×5.035) or Rs 7248 per ton (US$ 1=Rs 60). On gas based production of 18 million tons, additional cost would be Rs 13,046 crores annually. One fifth of this or about Rs 2609 crores is due to shift to GCV basis alone.
Since, under extant new pricing scheme (NPS) for urea, fertilizer manufacturers cannot transmit increase in feedstock/gas cost to farmers by way of higher selling price, government will have to compensate them as higher subsidy.
This will push total subsidy requirement during 2014-15 close to Rs 90,000 crores against net available funds of only Rs 30,000 crores (budget provision Rs 68,000 crores minus Rs 38,000 crores throw forward from 2013-14). Clearly, gas price hike will aggravate financial woes of fertilizer industry already suffering due to substantial under-payments.
Doubling of gas price – and Rangarajan formula on which it is based – is a subject of intense scrutiny public scrutiny as well as in court and there is a PIL pending in Supreme Court. RIL’s move to change basis of pricing has added a new twist raising hackles from users. Is there any valid justification for this?
While, finalizing its recommendations, Rangarajan Committee did not specify whether price would be charged on NCV or GCV basis. This left the field wide open to varied interpretation and RIL is using this void to its advantage.
It has argued that since hub prices used for internationally traded gas are fixed on GCV basis and Rangarajan formula uses these for determination of price applicable to domestic gas in India, by implication the price has to be on GCV basis only.
The difference between GCV and NCV is on account of impurities such as water or other gaseous content that add to volume. From user’s perspective, those components are redundant and what matters is usable heat or NCV available by burning a unit of gas.
So, the moment you shift basis to GCV, automatically the operator will get away with 10% higher price on NCV basis. But, why should this shift be allowed in very first place?
All along, all domestic gas including from RIL’s fields has been priced in terms of NCV. GCV basis has surfaced as a bolt from the blue just because this is the practice globally. Yet, if we are so keen to follow international standards, then that should be done ‘holistically’ as a package and cherry picking must be avoided.
Much of global trade in gas takes place at hub prices. These prices are reasonable and adequately protect supplier’s interest. Therefore, we should only take an average of hub prices in USA and Europe for arriving at price applicable to domestic gas. Net-back price from imported LNG must be excluded.
The prices of imported LNG are outright extortion taking advantage of tight global demand-supply balance and heavy dependence of countries like Japan and India on imports.
The cost of liquefaction and transportation can’t justify – by any stretch of imagination – a huge differential of US$ 17 per mBtu plus between hub price (US$ 3-3.5) and landed cost (US$ 20 and above)! Even so, these are irrelevant to pricing of domestic gas.
Rangarajan formula based price is also out of sync with prevailing prices in other countries viz., US$ 2.6 per mBtu in Russia; US$ 3.3 per mBtu in USA and US$ 1.5 per mBtu in UAE.
The structure of pricing domestic gas that government wants to put in place from April, 2014 neither adopts market based principle nor follows global benchmark. And, it does not consider cost of production approach either.
Adding salt to injury, now RIL has come up with an ingenious method of further jacking up price by using GCV basis. This could have been avoided if only Rangarajan report had clearly specified price to be on NCV basis in line with practice hitherto.
Government would do well to correct this miss now. More importantly, it needs to take a re-look at formula to address the concerns raised by users industries especially fertilizers and power which consume 75% of domestic gas.