In a boost to firms like ONGC and Reliance Industries, Cabinet clears new price formula for undeveloped gas finds

NEW DELHI: In a boost to firms like ONGC and Reliance Industries, the Cabinet today approved a new price formula for their undeveloped gas discoveries in difficult areas, which will lead to a near-doubling of rates.

While domestically-produced gas is currently priced at an average of rates in gas-surplus countries like the US, Canada and Russia, for deep-sea discoveries yet to be developed, the Cabinet Committee on Economic Affairs (CCEA) approved a price indexed to cost of alternative fuels -- naphtha and fuel oil as well as imported LNG.

Oil Minister Dharmendra Pradhan told PTI that the price will be the lowest of weighted average of fuel oil and imported LNG or weighted average of fuel oil, naphtha and imported coal.

With the current rates, the price of gas will come to USD 7 per million British thermal unit (mmBtu).

Gas price in India is currently at USD 3.82 per mmBtu, which will fall to USD 3.15 in April, a rate not enough to make up for the cost of deep-sea development.

Since this rate is not enough to incentivise exploration, the government approved the new price formula for undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure areas using average of landed price of naphtha, fuel oil and liquefied natural gas (LNG), he said.

About two dozen discoveries of the state-owned ONGC, Reliance Industries and the Gujarat State Petroleum Corporation (GSPC) in KG Basin alone are languishing for want of right price.

"The new price will apply to undeveloped gas discoveries and not on currently producing fields," Pradhan said.

Finance Minister Arun Jaitley, in the Budget 2016-17, had announced a two-stage gas pricing freedom.

"India is blessed with rich natural resources, including oil and gas. However, their discovery and exploitation has been below our potential," he had said in his Budget speech.

With near stagnation in domestic production and consequent rapid increase in imports, "the government is considering incentivising gas production from deep-water, ultra deep-water and high-pressure, high-temperature areas, which are presently not exploited on account of higher cost and higher risks," he said.

"A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels," he said.

The Economic Survey, too, had rooted for market-determined arm's length pricing for domestic gas.
"It was expected that the (October 2014) formula would balance the interest of producers and consumers in the country. However, market-determined arm's length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment and also ensure competitiveness and transparency remains the first-best solution that merits consideration," the Survey had said last month.

According to the report, the market-determined price would reflect the appropriate gas price in relation to alternative fuels.

"In the medium term, being a large consumer, India may be able to be a price-setter for gas prices in the region," it had stated.

As per the new formula, gas prices are to be determined on a semi-annual basis and calculated based on a volume weighted average of rates in gas-surplus nations of the US, Canada and Russia, based on the 12-month trailing average price with a lag of three months.

Goldman Sachs, in a recent report, said the current gas price regime is not incentivising domestic capex sufficiently as cost for new deep-water discoveries ranges between USD 6-7 per mmBtu.

Gas price in India, it said, is lower than USD 9 per mmBtu in China, USD 10.5 in the Philippines, USD 6.5 in Indonesia and USD 8 in Thailand and Malaysia.