Government clears gas pricing formula

Government clears gas pricing formula

New Delhi: Ending months of uncertainty, the government cleared Reliance Industies Ltd’s (RIL) gas price formula—which in effect caps the price of natural gas for the next five years—at $4.20 (Rs170.1) per million British thermal unit (mBtu), and clears a major roadblock for an already delayed next auction of the country’s gas and oil blocks.

The price is at Kakinada, Andhra Pradesh, where the gas is delivered onshore, and was approved on Wednesday by an empowered group of ministers (eGoM). It is just 3% lower than what RIL proposed—a price of $4.33 per mBtu, which excludes marketing margins and transportation costs.

Pranab Mukherjee chaired the eGoM on gas pricing

“It will not be in the country’s interest to renege the contractual provisions under the production sharing contract entered into good faith under the New Exploration Licensing Policy (Nelp)," a petroleum ministry press release said. “Sanctity of the signed, legally binding documents should be maintained."

In its release, the ministry claimed the final price was 8.32% lower than what RIL had sought. But the original RIL price was based on an exchange rate of Rs44 to $1 while the current government calculation is based on Rs40 to $1, which allows the government to now claim it lowered the RIL price by 8.32% while it is only 3% lower in dollar terms.

Dispute over the pricing of gas discovered by RIL in the Krishna Godavari basin, off the Andhra Pradesh coast, had led to fears that the government may renege on its commitment, under which producers were given the freedom to price the gas. This delay had, in turn, cast a major shadow on the 162 production sharing contracts the government has signed so far.

“The price resolution will have a positive impact on the upstream gas sector," says Ravi Mahajan, a partner at accounting firm Ernst & Young. “This should clear the road" for the next round of auctions. Several firms, including global players such as BP Plc., were awaiting clarity on the pricing front.

The eGoM, headed by external affairs minister Pranab Mukherjee and comprising power minister Sushil Kumar Shinde, minister of chemicals and fertilizers Ram Vilas Paswan, finance minister P. Chidambaram, law and justice minister H.R. Bharadwaj, petroleum minister Murli Deora, corporate affairs ministerPrem Chand Gupta and Planning Commission deputy chairman Montek Singh Ahluwalia, decided in its third meeting that the formula would be valid for five years from the date of first commercial production and supply.

The formula approved is binding on all producers for five years from the date of commencement of production and also delinks it from the dollar-rupee exchange rate. The fixed component has been pegged at $2.50 per mBtu. In the variable component, the eGoM has linked gas prices to the international prices of crude, but has capped it at a maximum of $60—as opposed to RIL’s proposed ceiling of $65.

The price of $4.20 per mBtu has been fixed assuming the maximum price of $60 per barrel of crude. Even if international prices do go beyond this cap, gas producers cannot charge more. Alternatively, if crude prices fall below $60, gas prices would decline commensurately.

Rachel Chatterjee, chairperson and managing director, Andhra Pradesh Transmission Commission (AP Transco), said, “There has not been any significant changes in the pricing. Our power generation costs will be high. This would demand either a tariff increase which would result in a burden on the consumers or a burden on the state governments who will have to dole out more subsidies to their power sector."

Ahead of the news, RIL shares touched a 52-week high of Rs2,022, before closing on Wednesday. A RIL official welcomed the decision and said, “The focus is now on timely execution of this world class project."

Angel Broking’s Rohit Nagraj says gas sales of up to 40mscmd from KG basin could boost RIL’s annual revenues by up to 10% for the first year of production. India, Asia’s third largest oil consumer, faces a natural gas supply crunch amid booming demand for the clean fuel. It produces 95mscmd, expected to rise to more than 190mscmd by 2009 after production from new gas fields comes on stream. Goldman Sachs estimates the share of natural gas in India’s coal-dominated energy basket will double to 18% by 2015 and stabilize at 20% by 2025.

Nidhi Verma of Reuters contributed to this story.