Oil Ministry For Tweaking Rangarajan Formula to Trim Gas Price Hike: Report

Oil Ministry wants to tweak the Rangarajan formula to slash a proposed increase in natural gas prices by nearly one-fourth to about $6-6.5/unit to make it affordable to consumers as well as incentivise exploration.

The ministry feels that some elements of the Rangarajan formula, which was notified by the previous UPA government in January but put on hold till September-end, have no relevance to pricing in India and should be removed, sources privy to the development said.

A Committee headed by Dr C Rangarajan had proposed that all domestic gas should be priced at an average of liquid gas (LNG) imports into India and US and UK trading hub rates as well as LNG imports into Japan. This formula would have led to a doubling of domestic gas price to $8.4 per million British thermal unit (mmBtu).

The ministry feels that the formula has included Japan's import prices even though that country is not a producer.

Also, it has "wrongly" assumed that prices at US hub and UK hub are equal to wellhead prices.

Besides, it has given equal weight to small Indian imports along with US and European trading volumes, sources said, adding that the ministry feels the correct way was to work out weighted averages.

The ministry feels that with these corrections, the modified Rangarajan Formula would yield a wellhead price of about $6-6.5 per mmBtu.

This, it opines, would be acceptable to the international investors and also to various sectors of Indian economy, though power sector would still find it difficult.

Also it would help in monetizing discoveries of Gujarat State Petroleum Corp (GSPC) in Deendayal block as well as those of Reliance Industries in Cauvery (CY-D5), R-Series in KG-D6 and Mahanadi (NEC) block, which are not viable at the current $4.2 per mmBtu rate.

Worried about the cascading impact of doubling of gas rates on power tariff, urea cost and retail price of CNG and piped cooking gas, the new government wants to tweak the formula, the sources said.

The new government had on June 25 deferred implementation of the Rangarajan formula till September-end to conduct a comprehensive review of the whole issue.

According to Rangarajan formula, gas prices were to be revised every quarter, and rates for this quarter would have been $8.8 per million British thermal unit, leading to hike in power cost by over Rs 2 per unit, urea production cost by Rs 6,228 per tonne, piped gas by Rs 8.50 per kg and CNG by Rs 12 per kg.

Both the Parliamentary Standing Committee on Finance and the Standing Committee on Petroleum had made adverse comments on the formula and called for looking at cost of production before deciding on the new rates.

Sources said the ministry believes that the cost of gas production varies between $1.86 per mmBtu to $4.31 per mmBtu but a cost-plus price would be perceived negatively by the market.