Gas pricing: Oil Mininstry plans extending formula to exempted blocks predating Nelp

NEW DELHI: The Cabinet has asked the oil ministry to examine if the recently approved gas pricing formula, from which a per-unit rate of $5.61 was derived, can be extended to several exempted blocks including the Cairn India-operated Rajasthan fields, government officials said. Cairn charges $8.4 per unit for its Rajasthan gas, ETreported in August.

The formula has applied since November 1 to several nomination blocks held by ONGC and Oil India and 254 blocks auctioned under the New Exploration Licensing Policy (Nelp). But it’s not applicable to at least 17 blocks that predate Nelp, including Rajasthan and Hazira fields. Their production sharing contracts (PSCs) allow explorers to sell gas at market-discovered rates without prior approval of government, oil ministry and industry officials said.

Approved by the Cabinet on October 18 the formula based on the recommendations of a committee of secretaries (CoS) aligned prevailing domestic rates with global benchmarks, including gas from Reliance Industries-operated KG-D6 fields.

At the time, the Cabinet had said: “As suggested by the committee (of secretaries), the possibility of applying modified approach to all PSCs, which provide for arm’s length pricing, but do not provide for approval of the formula/basis by the government, would be examined separately.”

The committee had proposed to the Cabinet that the oil ministry could see whether the pricing mechanism should apply to exploration contracts that predated Nelp, a suggestion that’s now being taken up.

Gujarat Narmada Valley Fertilizers Co. pays Cairn $8.40 per unit for gas from its Rajasthan block, ET reported on August 24. Cairn has found significant quantities of gas in the block and is currently developing some of these discoveries.

According to industry estimates, Cairn's gas fields are expected to produce at least about 7 million standard cubic metres per day (mmscmd) of gas, which is more than half the current output from KG-D6 block. A Cairn spokesman did not offer any comment on the proposal because the matter is not in public domain.

The government had constituted the CoS in August to review the gas price formula proposed by the Rangarajan committee in 2012 and approved by the UPA administration. The previous government, which had notified the new pricing mechanism in January 2014, could not announce the rate after the Election Commission vetoed its move because polls were imminent.