Centre proposes domestic gas price of $6-6.5 a unit

The new price will revive new gas discoveries, which are unviable at the current price

The petroleum ministry is understood to have recommended a new gas pricing regime for domestic producers, based on the wellhead cost in other producing countries. It suggested modifying the Rangarajan committee formula to arrive at a wellhead price of $6-6.5 per million British thermal units (mBtu) to revive new gas discoveries, unviable at the current price of $4.2 an mBtu, sources said.

For the eastern offshore KG-D6 block operated by Reliance Industries Ltd (RIL), the new price will be applicable only after the shortfall in gas production of 1.9 trillion cubic ft (TCF) is delivered at the earlier price. The new price will be applicable only to the subsequent production of 2.5 TCF, the ministry has said in a presentation to Petroleum Minister Dharmendra Pradhan, which was sent to the Prime Minister's Office for reference.

The recommendation is in line with the National Democratic Alliance government's decision not to accept a shortfall in production in KG-D6 and disallow cost recovery of $579 million. The new pricing mechanism will help monetise the discoveries of Gujarat State Petroleum Corporation in the Deendayal block and RIL's discoveries in Cauvery, KG-D6 R series and Mahanadi blocks, which aren't viable at the current rate.

On May 9, RIL and its partners in the KG-D6 block, BP Plc of the UK and Niko Resources of Canada, had served a pre-arbitration notice on the government, alleging failure to implement an earlier decision of gas price rise effective April 1 was preventing the sanction of investments worth about $4 billion. This was followed by a formal notice of arbitration on

June 17 by RIL-BP-Niko, naming London-based Sir David Steel as their arbitrator. On July 17, the government appointed former Supreme Court judge G S Singhvi as its arbitrator.

On January 10, the United Progressive Alliance government had notified a new domestic gas pricing formula that would have doubled gas rates to $8.4 a unit from April 1. However, the schedule of the general elections was announced before the new price could be announced. At that time, the Election Commission asked the government to leave the decision to the new government, and the revision of rates was postponed to July 1. In June, the new government decided to defer the decision until October, pending wider consultations.

On June 14, the government said it had imposed an additional penalty of $579 million on RIL for failing to meet gas production targets from the KG-D6 block in 2013-14. The fresh penalty was over and above the existing $1.797-million penalty for the shortfall in output in the past four years. The penalty is in the form of disallowing costs incurred by RIL in the block.

The following day, RIL said the government's rationale behind denial of cost recovery wasn't in line with the production-sharing contract.