Any decision on fuel pricing is controversial. So was the June 27 decision on fixing domestically produced natural gas price. Tough, therefore, laudable.

But, going through the fine print reveals that the Government may just have subtly brought gas pricing into a regulated regime.

Have a look: The contractors will no longer have the freedom to discover the price through an arms length mechanism, as the formula for discovering the price has been fixed for five years by the Government. Based on this formula it will compute the price on a quarterly basis and will be notified to the contractors.

Effective April 2014, all gas produced in the country will have the same price, irrespective of its source and regime it is being produced. Exception has been given to those contracts which provide a specific formula for natural gas price indexation/fixation like in case of Panna-Mukta-Tapti fields in the West Coast or Ravva fields in the East Coast.

Thus, the gas market is now controlled by the Government, as it not only decides on allocation of gas, but also pricing.

This is a situation similar to that prevailing in 1990s, when the pricing for gas produced by national oil companies from fields given prior to licensing regime was approved by the Cabinet. This price was applicable uniformly across the country.

The new price will no longer be field specific, as was the case with contractors like Reliance Industries’ D6 fields.

According to the Government, based on recommendations of the Rangarajan Committee, the Natural Gas Pricing Guidelines, 2013, will not only incentivise investments in the upstream sector, but ensure that producers do not form cartels because of the huge unmet demand. Summing it up with the famous line – “this will protect consumer interests”.

The approved formula is based on the weighted average of net back price of Indian LNG imports excluding spot purchases at the wellhead point of the exporting countries and weighted average of the prevailing price at the global trading points of transactions – Henry Hub (traded prices in the US), National Balancing Point of the UK, and netback price at the sources of supply for Japan.

At today’s rates of these points, domestic natural gas prices would be around $7/mmBtu. The price – if all factors remain the same – for domestic gas producers in 2014 would be around $8.4/mmBtu.

This, however, is an improvement over the prevailing situation, as it creates a stability of pricing regime and de-links prices from the demand side issues.

But, there are questions over complexity of the formula and its implementation, fear of political risk – tomorrow if another political regime comes into power, the situation can change.

Another question is why did the Government not fix prices for three years, why five? Why wait till 2014? Is it to help Reliance Industries, as new D6 gas price comes from April 1, 2014?

Besides, the Rangarajan Committee had also recommended a transition to free market prices in five years. The New Exploration Licensing Policy contracts commit free market price.

But the Government is silent on this.

(This article was published on June 30, 2013)
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