Producers, buyers wary of delay

With 10 days to go and the Government yet to notify the new price for domestically produced gas, there is a strong buzz that there might be a delay in the announcement. The reason, however, could be purely political.

The recent controversy about the Government raising the gas price, with politicians such as Aam Aadmi Party leader Arvind Kejriwal questioning the Government move, may delay the official announcement, said sources.

Even if the new price is announced some time soon, after getting the Election Commission’s nod, gas producers fear that they will not be able to meet the requirement of firming up the supply and sale agreements with the prospective buyers three weeks before the new price comes into effect.

Sources say the new price could range between $6.77 and $8/unit (gas is measured in million British thermal units). Research agency India Ratings said: “On the basis of feelers from the Petroleum Ministry, some industry report suggests a revised gas price of $6.775/unit.” The current price is $4.2/unit.

Subsidy

While the hike in gas price will mean an increase in urea subsidy impacting the central exchequer, the subsidy given to the power sector will have a bearing on State exchequers. Though electricity is on the concurrent list, it is up to the State Governments to bear a part of the cost to the consumer. A hike in gas prices will also mean the cost of production going up for both these sectors.

When asked about urea, a senior Fertiliser Ministry official said gas was feedstock for production of urea and any increase in feedstock prices is a pass-through.

An increase in price would mean the cost of production will increase, the official added. Since the Government controls urea pricing, the companies get compensated for selling it below market rates. Currently, urea is selling at ₹5,360 a tonne.

It is estimated that gas price increase to $8.4/unit would mean an additional subsidy of about ₹10,000 crore, the official said. In the Budget for 2013-14, the Finance Ministry provided ₹21,000 crore as subsidy for indigenous urea, which was revised to ₹26,000 crore. In the interim budget, the Finance Ministry has provided ₹31,000 crore for 2014-15.

The Fertiliser and Power Ministries have been making a case for cheaper gas price.

However, the Ministry of Petroleum and Natural Gas is believed to have suggested that the Fertiliser Ministry may seek higher subsidy from the Finance Ministry.

As far as the power sector is concerned, a back-of-the-envelope calculation shows that a $1 increase in gas price has an impact of 50 paise per unit (kwh or kilowatt an hour) on electricity bills.

If gas prices are revised to $6.775/unit, then fuel costs per unit for natural gas-based power generation could increase by 56 per cent to ₹3.41/unit (assuming the exchange rate is at ₹ 60 against the dollar).

“This would manifest itself as an increase of 9 paise/unit on the total power generation of 912 billion unit, which would lead to an additional burden of ₹7,800 crore towards gas costs,” a note written by India Ratings’ analysts Vivek Jain and Salil Garg said.

Any additional cost, which is also contributed by the fall in the rupee against the dollar, would ultimately have to be either recovered from consumers or borne by state power utilities.

(This article was published on March 20, 2014)
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