Rangarajan panel recommends average global prices for domestic gas

New Delhi: 

The Prime Minister-appointed Rangarajan Committee has suggested mandating a price of domestically produced natural gas at an average of international hub prices and cost of imported LNG instead of present mechanism of market discovery.

The panel in its report made public today suggested first taking an average of the US, Europe and Japanese hub or market price and then averaging it out with the netback price of imported liquefied natural gas (LNG) to give sale price of domestically produced gas.

Industry sources, however, raised doubts saying acceptance of the recommendations would lead to overriding of the signed contracts. Currently, production sharing contracts (PSCs) provide for gas being sold at an arms-length price discovered through market bids invited from potential users.

Acceptance of the recommendation would mean government mandating a price of gas and ending the last of the remaining freedoms available, they said.

The government has already taken over the task of fixing users curbing marketing freedom guaranteed in PSC.

Sources also questioned how a market price in the US or Europe which is a function demand and supply in that region, could be applied to a hugely fuel deficit nation like India.

The US has low gas prices because of abundant fuel with the advant of shale gas while demand in Europe and Japan, unlike India, has fallen.

The panel headed by C Rangarajan, the Prime Minister's Economic Advisory Council Chairman, said the PSC provides for arm's length pricing and prior government approval of the formula or basis for gas pricing, subject to policy on natural gas pricing.

"Since no market-determined arm's length price currently obtains domestically and nor is this likely to happen for several more years, a policy on pricing of natural gas has been proposed," it said.

The Committee recommended deriving one price from "the volume-weighted net-back price to producers at (LNG) exporting country well-head for Indian imports for the trailing 12 months."

Simultaneously, the volume-weighted price of US's Henry Hub, UK's NBP and Japan Custom Cleared prices for the trailing 12 months be calculated.

"The arm's length price thus computed as the average of the two price estimates would apply equally to all sectors, regardless of their prioritisation for supply under the Gas Utilisation Policy," it said.

Industry sources said no LNG exporting country ever declares its netback or producer price and it would be extremely difficult to determine that.

"The proposed policy would provide for estimation of an unbiased arm's length price based on an average of two prices, which can be interpreted as alternative estimates of an arm's length price for the Indian producer," the Rangarajan panel said.

The suggested formula will apply to pricing decisions made in future, and can be reviewed after five years when the possibility of pricing based on direct gas-on-gas competition may be assessed, it added.

On the future exploration contracts, it said the existing PSC allows the contractor to recover his cost, before giving the government its share in the contractor's revenues, in case there is commercial discovery leading to production.

"Under this system, a close scrutiny of costs becomes critical for the government since there is incentive for contractors to book as costs expenses that do not reflect the true economic cost to the contractor (like through transfer pricing)," it said. "This is perceived by contractors as interference in commercial decision-making, whereas the government and CAG view it as legitimate and necessary."

Stating that cost recovery is at the root of the problems experienced, it proposed to dispense with it, in favour of sharing of the overall revenues of the contractor, without setting off any costs.

"The share will be determined through a competitive bid process for future PSCs," the report said. "The bids will be made in a bid matrix, in which the bidder will offer different percentage revenue shares for different levels of production and price levels."

This will ensure that as the contractor earns more, government gets progressively higher revenue, and will also safeguard government interest in case of a windfall arising from a price surge or a surprise geological find.

The committee has also recommended that an extended tax holiday of 10 years, as against 7 years already available for all blocks, be granted for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500 metres, since cost of a single well can be as high as $150 million.

Further, the committee has recommended extending the timeframe for exploration in future PSCs for frontier, deep-water (offshore, at more than 400 m depth) and ultra-deep-water (offshore, at more than 1,500 m depth) blocks from eight years currently, to ten years.

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