The government on Wednesday night finally approved the formulae to resolve the vexed pricing of the gas to be explored by Reliance Industries Limited (RIL) in the Krishna Godavari (KG) basin by lowering the offered fuel price by more than 8 per cent.
The gas pricing formulae — an issue which generated controversy — was finalised by the Empowered Group of Ministers (EGOM) headed by External Affairs Minister Pranab Mukherjee at a meeting here. The gas pricing formulae, resolution of which now paves the way for the next round of auctioning oil and gas blocks, has excluded exchange rate fluctuations from the formula and lowered the ceiling of the $65 a barrel price band to $60 a barrel.
This decision of the EGOM will lead to a gas price of $4.20 per mBtu at delivery point which translates into a price of Rs 172.20 per mBtu at the prevailing Indian rupee-US dollar exchange rate, a release issued by the Petroleum Ministry said.
It may be noted that the RIL had proposed to price gas at $4.33 per mBtu or Rs 187.84 per mBtu.
The EGOM decided that the price basis/formula submitted by RIL and its partner Niko Resources, may be accepted with modifications as per the recommendations of the Prime Minister’s Economic Advisory Council (EAC), including denomination of the entire formula in US dollars, the Ministry said.
For all fields awarded in six rounds since 2000, the natural gas price calculation would be pegged at a constant of $2.50 per mBtu.
The EGOM noted that it would not be in the country’s interest to renege from the contractual provisions under the Production Sharing Contracts (PSCs) entered into in good faith under the New Exploration and Licensing Policy (NELP). Sanctity of the signed, legally binding contracts should be maintained, the EGOM decided.    
The EGOM also decided that the cap for price of crude in the variable portion of the formula would be frozen at $60 per barrel instead of $65 per barrel, as proposed by the RIL.
This would in turn translate into a lower consumer price by reduction in the ceiling of the crude price.This price basis/formula will be valid for five years from the date of commencement of first commercial production and supply.
The price discovery process on arms-length basis will be adopted in the future NELP contracts only after the approval of the price basis/formula by the government. The price discovered through this process would be applicable to all the sectors uniformly, the Petroleum Ministry said.