New Delhi: Adding to the angst of upstream companies, state-run ONGC and OIL as well as the private sector giant Reliance Industries (RIL), the government on Wednesday slashed domestic gas prices by over 18 per cent to $4.24 per million British thermal units from $5.18 per mBtu.The petroleum ministry’s decision to lower the gas price was based on a new pricing formula approved by the government in October last year, that allows price revisions twice a year.
The reduced price will benefit the top players in sectors across fertilisers, power, steel and cement that consume domestic natural gas as feedstock. However, Lloyd’s Registry chairman for South West Asia, RS Sharma told Financial Chronicle, “The decision (to reduce domestic gas prices) is an extremely regressive step that will impact domestic upstream companies.” Sharma, a former chairman of ONGC said, “In the first instance, dilution of the Rangarajan committee formula itself was not correct, though it was consumer centric.”
He maintained that about $7 billion to $ 9 billion investment in ONGC’s east coast project would become unviable at this rate. According to Sharma, countries like China, Indonesia and the Philippines were importing gas at prices ranging between $10 and $12 per mBtu, while India has pushed down the prices to $4.24 per mBtu. That is unsustainable. He also described the centre’s decision as ‘voter-centric’, basing his argument on the Bihar assembly election scheduled next month.
The gas pricing formula essentially captures global trends with emphasis on rates prevailing in the US, the UK, Canada and Russia. The downward revision in gas prices has factored shale production in the US, steep fall in crude prices globally and slide in major currencies like the Russian rouble, besides depressed common index prices for gas internationally. The lower gas price has been effected in the wake of 37 per cent fall in natural gas futures on the New York Mercantile Exchange during the past one year, as per data compiled by Bloomberg.
For the past 10 years, private sector RIL, that controls huge assets in the KG basin in the Bay of Bengal, has been seeking upward revision in basic formula used for computing natural gas prices. RIL and its partners Niko Resources and British Petroleum have been fighting legal battles with the government for not adhering to the gas exploration plan from the KG basin where their output has dropped to a meagre 11 million standard cubic feet per day (mscmd), that also includes 4-5 mscmd from smaller fields in the same basin.
Intellectuals, oil industry analysts and even sections of the government have held that RIL has intentionally reduced its output from KG-D6 block pending upward revision in rates, while RIL maintains that the fall in production has nothing to do with pricing and is due to technical glitches and geological surprises.
RIL has also been demanding that the price of natural be increased to $8.4 per mBtu that was set under the UPA regime, as per a formula fixed by a committee headed by C Rangarajan, economic adviser to former prime minister Manmohan Singh. The price $8.4 per mBTU was notified on January 14, 2014 and was to be applicable from April 1 that year. This was later deferred in view of the general election in May last year. On coming to power, the BJP government issued a fresh guideline on November 1, 2014 and raised the price of gas to $5.61 mBtu from $4.2 mBtu and insisted that the guideline would apply uniformly to all sectors of the economy and allocation would also be as per the revised gas utilisation policy.
RIL spokesman Ramaswamy Gurumoorthy was not available for comments on the latest price revision. Oil industry analysts have said that the reduction in gas price would only make India import-dependent, especially for LNG from countries like Mozambique and the US.
Those countering that argument say Iran has offered to sell natural gas to India at $2.4 per mBtu for the proposed urea plant being set up Indian companies in that country. On Wednesday, an official in the petroleum ministry’s planning and analysis cell confirmed that domestic natural gas price has been cut to $3.82 per mBtu based on gross heat value. This translates to $4.24 per mBtu at the consumer end, based on net heat value.
During last six months, the gas price was fixed at $4.66 per mBtu on gross calorific value that translated to $5.18 based on net heat value
