The recommendations of the C. Rangarajan Panel on gas pricing overlook some key issues and are, therefore, ‘defective’, feel domestic natural gas producers.
They hold this view despite the fact that, if implemented, domestically produced gas price would double at almost $8/mmBtu. Gas producers such as Reliance Industries, ONGC, and Cairn India, under the aegis of AOGO (Association of Oil & Gas Operators), argue that the markets/hubs used in price calculations must be where demand far exceeds local supply, as is the case in India.
The Rangarajan panel has suggested a pricing formula based on the average of two prices – the price at other producing destinations and the volume-weighted price of US’s Henry Hub, UK’s NBP and Japan Custom Cleared (on net-back basis, since it is an importer). Both Henry Hub and NBP or National Balancing Point are traded prices.
The producers say that in a consuming economy, where gas is in short supply, the prices are higher than in a producing economy and, therefore, the “congruence with production incentive economies such as the US or Europe is ‘defective’.
In their submission to Petroleum & Natural Gas Minister Veerappa Moily these companies have said that the index must be based on transparently available information, which is easy to compute and avoids disputes between buyers and sellers. On its part, the Ministry is evaluating the submissions of the producers before firming up its views.
In fact, in his Budget speech, Finance Minister P. Chidambaram had said that “the natural gas pricing policy will be reviewed and uncertainties regarding pricing will be removed.” Today, the NPB is around $11.5/mmBtu, Henry Hub $4/mmBtu, JCC linked about $15/mmBtu, spot LNG $18-19/mmBtu, and the long-term contract gas at around $11.7/mmBtu. The producer price according to estimates would be close to $11/mmBtu. While domestically produced gas is priced between $4.2-$5.7/mmBtu.
The producers further say that any index-based formula must have a variable biddable part, which creates a competitive price discovery through a transparent bidding process, as mandated under the production sharing contract (PSC). There cannot be a fixed prioritisation/allocation to make bidding an infructuous exercise, they say.
According to the Rangarajan panel, an arm’s length price computed as the average of the two price estimates would apply equally to all sectors, regardless of their prioritisation for supply under the Gas Utilisation Policy. At present, allocation of the gas is done by the Government.
The producers also point out the difference in the quality of gas produced in India and overseas, which results in overseas producers getting a higher return. Besides, gas produced overseas faces lower risk and development costs. Therefore, they question the validity of using these as a base for determining a fair return to producers.
A non-remunerative price is unlikely to attract exploration in challenging areas, and may even make some current discoveries non-commercial, the producers say.