Rate of gas to be doubled as Government notifies new Gas Pricing Formula
On the eve of Petrotech Conference, the Government has given a respite to the gas exploration industries by notifying the new Gas Pricing Formula which will double the rate of gas to $8.4 per unit from April 2014, for all domestic output.
Pros and Cons of New Gas Pricing Formula
On the positive side: The move likely to stimulate development of new fields, which was not possible earlier as companies such as Reliance, that has several proven discoveries, did not know how much revenue the gas fields would generate. The new pricing formula has been eagerly awaited by the oil and gas industry since June 27, 2013, when the Cabinet first approved the new pricing system based on recommendations of the Rangarajan Committee. However, the matter was reviewed after the finance ministry expressed concerns about the ongoing legal battle between Reliance Industries and the oil ministry, which had penalized the company for the significant decline in gas output.
As per a guideline in the new pricing formula, in respect of D1 and D3 gas fields of KG-D6, the company involved in production will have to submit bank guarantees that could be encashed by the government if it is proven that the company suppressed output and hoarded gas in the above mentioned fields. The new gas prices would be applicable evenly for all other fields in the country except a few whose prices are contractually fixed and some small and marginal fields that require special dispensation.
On the negative side: It is a bad news for power and fertilizer companies who lobbied intensively against the decision to raise domestic gas prices. This would raise fertilizer subsidy and raise costs staggeringly for gas-fired power plants. Gas prices would be revised every quarter to align them with the average of international benchmarks and the average price of long-term imports of LNG.
Formula challenged in Apex Court:
Currently, the government’s decision to accept the Rangarajan Committee’s gas pricing formula has been challenged in the Supreme Court which would be heard in early March 2014. Notwithstanding this, the government has moved ahead with its notification of the pricing formula.