Govt doubles natural gas price

Govt doubles natural gas price

Ignoring strong opposition from Left parties, the Centre on Thursday doubled natural gas prices to $8.4 per million British thermal units (mmBtu) from April 1, 2014. The current price is $4.2 per mmBtu.

The decision may lead to an increase in power tariff and price of urea and compressed natural gas (CNG).

The Cabinet Committee on Economic Affairs (CCEA) headed by Prime Minister Manmohan Singh approved the Oil Ministry’s proposal to price all domestically produced natural gas according to a complex formula suggested by a panel headed by the prime minister’s economic adviser C Rangarajan.

Oil Minister M Veerappa Moily said: “The CCEA has approved the Rangarajan panel formula for pricing of gas. It will be applicable from April 1, 2014, and valid for five years.” This is the first revision in gas prices in three years.

Moily, who is under attack from the Left parties for allegedly favouring Reliance Industries, is likely to explain the rationale behind the government’s decision on Friday.

The price was apparently hiked to make the sector more attractive to investors, since a huge investment is required to excavate India’s deep sea gas reserves.
However, fixing the gas price at $ 8.4 will affect the common man directly since fertiliser, power and CNG prices will go up. These sectors will have to shell out more to avail the gas. A large number of fertiliser and power plants, which depend on gas, had earlier opposed the hike. The gas-starved sector will have to shell out an additional Rs 7,200 crore once the new prices come into effect.

“Since the power sector receives over 30 million standard cubic meters per day from various sources, the additional cost on account of this is likely to add up to around Rs 7,200 crore each year,” said the Association of Power Producers.

As the fertiliser plants have to purchase the high-value gas, the price of urea may increase by Rs 4,000 per tonne.
 
The Rangarajan formula uses long-term and spot liquid gas (LNG) import contracts, as well as international trading benchmarks, to arrive at a competitive price.  While the Rangarajan panel had recommended revising domestic gas prices every month, the Oil Ministry wanted a quarterly revision.


Though the average now comes to $ 6.775, the price of gas in April next year will be around $ 8.42 and over $ 10 in the following year. This is because Petronet’s deal with Qatar’s RasGas (India’s only functional long-term LNG contract) has a price cap which will be lifted in January 2014.

While RIL’s KG-D6 gas price was fixed in 2007 at $ 4.205 per mmBtu for the first five years of production, the APM gas rates were last revised in June 2010, when prices were raised to $ 4.2 from $ 1.79. RIL began production from the KG-D6 field in April 2009.

Variable cost of generating electricity may be around Rs 5.40 per kilowatt hour with the new gas price, taking the total cost of generation to Rs 6.40 per unit. The present cost is Rs 2.93 per unit.

The outgo for every $ 1 increase in gas price will be up to $ 1.138 billion (Rs 6,260 crore). Outgo for the fertiliser sector due every $ 1 increase in gas price will be $ 406 million (Rs 2,233 crore).

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