Taking advantage of softening global prices, the Government on Saturday took the cautious route of fixing the price of domestically produced natural gas at $5.61 a unit (gas is measured in million British thermal units) up from $4.2 a unit currently. The new price, applicable from November 1 will be effective prospectively and revised on a half-yearly basis.

However, the price of $5.61 a unit is the well-head price which does not take into account the transmission and marketing costs. Therefore, the end-user will get the natural gas at around $6 a unit or more.

Domestic gas is also being sold at a base price of $5.7 a unit. Currently spot prices of the spot price of RLNG (Re-gasified Liquefied Natural Gas) are around $15 a unit while imported gas from Qatar is around $13.5 a unit.

Sources in the power industry told Business Line that any increase in over $5 a unit in the base price of gas (excluding transmission charges, local levies and marketing margins) is unviable for the electricity generators. According to the power industry officials, every dollar increase in gas price will result in electricity costs going up by almost 45 paise a unit

The hike will also have implications on fertiliser industry and increase CNG prices for consumers. For the fertiliser sector it each dollar increase leads to a Rs 1,370 per tonne rise in urea production cost.

"Cabinet has approved the reworked formula keeping in consideration that there is sufficient incentive for drilling and exploration while not making it prohibitive for consumers," said Finance Minister, Arun Jaitley at a briefing after the meeting of Cabinet Committee on Economic Affairs.

The new formula was derived from a combination of the C Rangarajan formula, which recommended a $8.4 a unit price for gas, and recommendations of the committee of secretaries, said Jaitley.

The formula takes into account gas consumption in USA, Mexico, Canada, European Union and Russia.

As a result of the hike, the Government will get an additional revenue of around Rs 3,800 crore a year on account of higher royalty, higher profit petroleum and higher taxes.

However, the price will not be applicable for Reliance Industries's D1 and D3 fields in the Krishna Godavari basin on the east coast of India, as the matter is under arbitration. Gas from the fields will be pooled and sold to consumers at the new price by GAIL (India) Ltd, but RIL will get the old price of $4.2 a unit.

Clarity is also awaited on whether the price is applicable for other production sharing contract regime blocks like Panna Mukta Tapti. The revised gas price would be applicable to all gas produced from nomination fields given to ONGC and OIL India, NELP blocks, such Pre-NELP blocks where PSC provides for Government approval of gas prices and CBM blocks.

Deepwater and ultra-deep water fields will also get a premium which would be determined at an appropriate time, a statement from the Government said.

The $5.61 price is based on the gross calorific value (the gross heat value of a fuel). The price on a net calorific value would be $6.17. Currently, the price of domestically produced gas is $4.2 a unit based on the net calorific value.

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