Capping the price of domestic gas will be a retrograde step. It will undermine the 2014 formula-based pricing system and also give bureaucrats unnecessary powers
The Union Government is contemplating putting a cap on the price of domestic gas. The Ministry of Petroleum and Natural Gas has prepared a draft note for consideration by the Cabinet Committee on Economic Affairs. Based on the recommendations of the Committee of Secretaries, the National Democratic Alliance regime in October 2014 approved of the new pricing guidelines for domestic gas.
According to the guidelines, the price of gas will be determined based on the ‘modified’ Rangarajan formula that came into effect from November 1, 2014. The R-formula, used the average prices of global benchmarks — the hub price at Henry Hub in the US, the price at the National Balancing Point of the UK, and the producers net-back from supplies of liquefied natural gas to India and Japan.
However, it did not specify whether the price would be on basis of the net gross calorific value (this was used all along for pricing gas in India) or on the gross calorific value as per international norms. On one hand, the modification involved substitution of LNG price of gas supplied to Japan by Alberta Gas Reference price for consumption in Canada. On the other, price of LNG imports to India was replaced by actual price of gas in Russia, weighed by consumption in Russia.
On basis of this, the Government approved a price of $5.05 per million British thermal units on Gross Calorific Value basis. On Net Calorific Value basis, this works out to $5.61 per per million British thermal units. The above price is the gas price from November 1, 2014, to March 31.
Thereafter, the price will be revised bi-annually using weighted average of reference prices for a full year three months prior to the effective date for next revision. Thus, for price effective from April 1, the relevant year will be January-December, 2014.
The guidelines apply to pricing of gas supplied from nomination blocks of Oil and Natural Gas Corporation and Oil India Limited; supplies from blocs awarded under the new exploration and licensing policy; blocs under pre-NELP where production sharing contract requires approval of the price by the Government and coal bed methane gas.
For deep water blocs, ultra-deep water blocs which present challenging geological environment, Government will consider giving a ‘premium’ price. This will be determined in a transparent manner based on clearly laid down criteria. The guidelines in this regard are expected to be ready early.
The formula-based pricing of gas is consistent with the underlying spirit of production sharing contract which requires price to be determined on market principle. In a nutshell, the new structure of gas pricing strikes a judicious balance between interests of producers and consumers.
Yet, in its zeal to completely immunise the power and fertilisers from fluctuations in international prices, MPNG is now seeking to put a ceiling on the price. In other words, after determining the price using the formula approved by the Government itself, it will fix a cut-off level beyond which the price cannot go.
This is a retrograde step and will undermine the sanctity of formula-based pricing. It will inject an element of subjectivity and give the bureaucrats an opportunity to meddle with the pricing mechanism. The very concept of ceiling on gas price, reminiscent of administrative controls in the 1990s, is contrary to the principle of policy driven decisions adumbrated by the Prime Minister.
The Government must not tamper with the October 2014 guidelines on gas pricing. Concerns of formula-based prices rising beyond affordable limits should be addressed by reforming the sectors. The Government should get cracking on urea de-regulation while protecting poor farmers with direct income support.
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