Says gas pricing doesn't take current or future scenario into consideration

Richa Mishra

Not suitable


Company officials

said the cost of production with returns methodology is least suitable for fixing price of a commodity like gas.

Producer prices

worked under the method were based on historical costs as per books of accounts.

New Delhi, Sept. 24

Oil and Natural Gas Corporation has expressed disagreement with the recommendations of the Tariff Commission in its draft report on producer prices of gas.

The state-owned oil and gas major, which is expected to present its views to the Union Petroleum Ministry on Monday, felt that the Commission had not considered the current or the future gas scenario.

Lower hike

Senior company officials told

Business Line

that the Commission has suggested an 8 per cent increase in the price of natural gas produced by ONGC to Rs 3,450 per thousand standard cubic metre (SCM).

But this increase was significantly lower than the 20 per cent increase in consumer price (Rs 3,840 per thousand SCM) announced by the Government recently for gas supplies under the Administered Price Mechanism (APM).

The suggested increase by the Commission is calculated on the basis of the natural gas price of Rs 3,200 per thousand SCM, which was revised by the Government by 20 per cent on June 5, sources said.

Low revenue

ONGC's annual revenue from the sale of about 50-55 MMSCMD gas is about Rs 6,600 crore.

The company's gas sales are around 18 billion cubic metre (BCM) (excluding the joint venture) and if the 8 per cent increase is factored in, ONGC's revenue will increase by about only Rs 450 crore, much lower than the additional revenue of about Rs 1,150 crore that the company would have earned if the 20 per cent increase is considered.

The Government recently increased the price of APM gas to all consumers other than the power and fertiliser sectors by 20 per cent from Rs 3,200 per thousand SCM so as to keep the APM gas price in tandem with market price in the next five years.

Under the latest pricing order, ONGC has been permitted to market gas from new fields and additional gas from existing fields in New Exploration Licensing Policy (NELP) terms, subject to determination of producer price by Tariff Commission.

Least suitable

Company officials said the cost of production with returns methodology is least suitable for fixing price of a commodity like gas, as producer prices worked under this method were based on historical costs as per books of accounts.

"These are based on GAAP accounting practices which are not relevant for a pricing exercising. For instances, these practices do not adequately reflect the exploration costs in gas price," the official explained.

The exploration companies are seeking market-related pricing.

The normative production cost as determined by the Commission does not incorporate the impact of additional investments planned in offshore and onshore producing fields, sources pointed out.

As regards the differential price of about Rs 590 per thousand SCM between ONGC and Oil India Ltd on the natural gas produced by them, ONGC officials did not want to comment, stating that they would express their views before the Ministry.

The Commission has suggested a price of Rs 4,040 per thousand SCM for OIL.

This differential would translate into a loss of about Rs 1,062 crore for ONGC, sources said.

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(This article was published in the Business Line print edition dated September 25, 2006)
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