This Article is From Jul 09, 2014

Economic Survey for Market Pricing of Natural Gas

New Delhi:

Weeks after the new government deferred a decision on revising natural gas prices, the pre-budget Economic Survey has called for market-linked pricing to boost domestic oil and gas exploration, and production.

The Finance Ministry's economic report card said there will be "under-investment" if India pays lesser price than the world rate for extraction of minerals.

"In the field of natural resources where there is global trading, appropriate incentives for exploration and extraction in India are obtained when there is pricing parity with the world price excluding transport costs or taxes," said the Economic Survey, tabled in Parliament by Finance Minister Arun Jaitely on Wednesday.

In essence, the Economic Survey is for pricing domestic natural gas at fob (free-on-board) rate for liquefied natural gas (LNG) imported into India by ships.

Private producers like Reliance Industries too are seeking a rate equivalent to the price at which gas in its liquid form (liquefied natural gas) is imported into India on long-term contracts.

They feel the current gas price of $4.2 per million British thermal unit, which is one-third of the price at which India imports long term LNG from Qatar, is not enough to produce from newer fields in the deep sea.

"If firms obtain a lower revenue per unit of mineral extracted in India, there will be under-investment in exploration and extraction," the Survey said.      

The Cabinet Committee on Economic Affairs (CCEA) had on June 25 deferred a decision on implementing the Rangarajan formula for pricing of all domestic natural gas that was approved and notified by the previous UPA regime.

The Rangarajan formula calls for pricing of domestic gas at 12-month average of price prevailing on international hubs in the US and UK and actual cost of LNG imports into Japan and the rate at which India imports LNG.

This formula would have led to doubling of gas price but the rate would have been short of $12.67 that India pays to Qatar, at oil price of $100 per barrel, for importing 7.5 million tonnes per annum of LNG.

The new government wants a comprehensive review of the Rangarajan formula keeping in view the paying capacity of consumers.

Every US dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff. There would also be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.

"Auction-based procurement or fixed-price procurement has run into many difficulties. These can be avoided by using a percentage revenue share for the government, through which the government becomes a partner in sharing the risks of exploration, extraction and world price fluctuations, alongside the private firms," the Economic Survey noted.