New Delhi: The government has increased the price of subsidized gas sold by state-owned firms to the same level as that of gas from Reliance Industries Ltd’s (RIL)’s field in the Krishna-Godavari (KG) basin, a move that brings considerable relief to these firms and initiates pricing reform in the energy sector by setting the stage for deregulation of prices.
The increase works out to a steep $2.50 (Rs115) per million British thermal unit (mmBtu) and takes the price of this so-called administered price mechanism, or APM, gas to $4.20 per mmBtu.
Still, while the decision taken by the Union cabinet on Wednesday will bring relief to state-owned upstream firms such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL), it will push up fuel costs for the sensitive power and fertilizer sectors, putting pressure on companies to pass on the increase to consumers.
It will also mean an increase of 20% in the price of compressed natural gas, or CNG, the fuel of choice for heavy vehicles that transport passengers in some large cities, including New Delhi and Mumbai. The increase will mean that gas-based power will cost around Re1 more per unit.
APM gas refers to gas produced by ONGC and OIL from fields awarded to them on a so-called nomination basis, without auction (as opposed to those awarded to companies under the New Exploration Licensing Policy). Around 90% of the gas is consumed by the power and fertilizer sectors.
“ONGC and OIL have been making substantial under-recoveries and losses and, therefore, it was necessary to revise prices. The prices were last revised in 2005,” Union information and broadcasting minister Ambika Soni told reporters after the cabinet meeting.
Marketing margins, transportation charges and taxes will be added to the price, such as the price of RIL’s KG gas decided by the government.
Interestingly, the cabinet’s decision may have a bearing on the ongoing dispute between NTPC Ltd and RIL in the Bombay high court.
The lawsuit between the two firms dates back to December 2005, with the point of contention being the existence and terms of a valid contract between them.
NTPC claims there is one in which RIL promised to supply 12 million standard cu. m a day (mscmd) of gas for the expansion of the state-owned power generator’s Kawas and Gandhar power plants, both in Gujarat, for 17 years at a price of $2.34 per mmBtu. RIL claims otherwise.
A senior NTPC executive said: “Even we are worried (about the court case). However, one can’t disown the contract price, it will become a big issue.”
ONGC chairman and managing director R.S. Sharma described the cabinet’s decision as “long-awaited relief”.
“The cabinet had decided in May 2005 for the revision of APM price. During the intervening period, we registered an under-recovery of Rs5,000 crore. This price increase helps us to wipe out these under-recoveries,” said Sharma.
T.K. Ananth Kumar, director (finance) at OIL expressed satisfaction. “We are waiting for the notification to assess the impact. We are expecting a Rs700 crore positive impact to our topline,” he said.
Customers in states such as Gujarat, Delhi, Andhra Pradesh and Tamil Nadu, which primarily use gas-based power, will be the worst affected.
A senior NTPC executive, who did not wish to be identified, said that every dollar increase in the price of gas would increase the price of power by around 35 paise. The executive added that his firm had opposed the move to raise prices.
However, Apurva Chandra, joint secretary (marketing) in the petroleum ministry said, “It (price hike) would impact the cost of power marginally and the selling price of fertilizer will not be affected as the government will get revenues from national oil companies, which will help reduce the subsidy outgo.”
Chandra’s reference is to the subsidy the government pays to fertilizer makers for selling their products at a price lower than the cost of production—a sop designed to benefit poor farmers.
India has a power generation capacity of 157,000MW. Of this 14,000MW is gas-based, and operates at around 70% efficiency due to a shortage of the fuel.
Prayesh Jain, an analyst at equity research firm India Infoline Ltd, said power and CNG companies would pass along the increase to customers, but that the fertilizer subsidy would increase. He added that the government’s move could affect the RIL-NTPC case.
This price hike comes at a time when the government is mulling a single price for natural gas sold to various sectors. The government is also preparing to move ahead with decontrol of fuel prices to target burgeoning subsidies. An empowered group of ministers is slated to meet on 7 June to decide on the issue.
In another decision, the Cabinet Committee on Infrastructure allowed NTPC to go ahead with its deal with Russia’s Technoprom Exports (TPE) for its controversial 1,980MW Barh project in Bihar.