ET BureauThe government would appear to have given primacy to the political calculus while dumping the Rangarajan formula for revising natural gas prices and adopting the new one it has. While a number has been announced, a little higher than what Reliance now gets for gas from the KG Basin and below what the Rangarajan formula would have yielded, this is only for mass consumption. The gas price that would be available to a would-be investor in India’s under-explored hydrocarbon sector remains undisclosed. What this price would be and whether it would offer any incentive to invest would depend on three things, on which clarity is easy only on one count at the moment.
These are the three things that remain opaque. One, would cost recovery be allowed as at present or would future bids be based on a share of aggregate revenue from the field, regardless of cost? If cost is allowed to be recovered, then investors would be willing to accept a relatively low selling price. Two, what is the premium the government says it is willing to give investors in deep-water fields? Will this figure be arbitrary, to be decided by the government on a case-by-case basis, or will there be a transparent mechanism based on measurable parameters? Finally, and this is relatively minor, how is the transport cost of gas traded at hubs to be determined, what is the assumed origin of the traded gas (after all, the gas traded at Henry Hub in the US could include, in theory, regasified LNG)?
The new formula excludes any LNG price (shorn of the costs of transportation, liquefaction and regasification, as recommended by C Rangarajan). Given the reality that India will continue to depend on LNG imports in the near future, is zero weightage for LNG justified, as a determinant of the retail price? And would the premium that is paid to deep-water investors be passed on to consumers? If so, how? In the absence of clear answers to questions such as these, we are back to an administered pricing regime for gas, with the profitability of hydrocarbon investment a function of political goodwill. This is not particularly reformist, to say the least.
These are the three things that remain opaque. One, would cost recovery be allowed as at present or would future bids be based on a share of aggregate revenue from the field, regardless of cost? If cost is allowed to be recovered, then investors would be willing to accept a relatively low selling price. Two, what is the premium the government says it is willing to give investors in deep-water fields? Will this figure be arbitrary, to be decided by the government on a case-by-case basis, or will there be a transparent mechanism based on measurable parameters? Finally, and this is relatively minor, how is the transport cost of gas traded at hubs to be determined, what is the assumed origin of the traded gas (after all, the gas traded at Henry Hub in the US could include, in theory, regasified LNG)?
The new formula excludes any LNG price (shorn of the costs of transportation, liquefaction and regasification, as recommended by C Rangarajan). Given the reality that India will continue to depend on LNG imports in the near future, is zero weightage for LNG justified, as a determinant of the retail price? And would the premium that is paid to deep-water investors be passed on to consumers? If so, how? In the absence of clear answers to questions such as these, we are back to an administered pricing regime for gas, with the profitability of hydrocarbon investment a function of political goodwill. This is not particularly reformist, to say the least.
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