EGoM to discuss on gas pricing on May 7

May almost double price of domestic natural gas, leading 2.6% hike in electricity tariff and a 13% rise in fertiliser subsidy

An Empowered Group of Ministers (EGoM) will meet on May 7 to consider nearly doubling the price of domestic natural gas, a move that is expected to result in just a 2.6% hike in electricity tariff and a 13% rise in fertiliser subsidy.

The EGoM headed by Defence Minister A K Antony will consider pricing methodology suggested by the Rangarajan committee that would lead to gas price jumping to a little under $8 per million British thermal unit from current $4.2, official sources said.

While the increase in gas price is being opposed by user ministries of power and fertiliser and the subsidy-bearer department of expenditure, industry experts feel the rate hike is long overdue and will incentivise domestic exploration.

Kotak Institutional Equities in a note on the issue said the increase in gas price would result in power price rising by 10 paisa per unit and will consumer price will rise by just 2.6%. For the fertiliser sector, the price hike would mean a 13% rise in subsidy bill.

The impact of gas price increase on fiscal deficit would be 0.1% of GDP, it said.

"The finance ministry will be relatively immune to the implications of moderate gas prices as per any formula. It will recover higher subsidies on urea from likely higher revenues and profits of the Government-owned companies (OIL, ONGC)" as well as higher royalty and profit from fields owned by firms like Reliance Industries, it said.

Stating that low gas prices will not result in any meaningful investment in the gas sector, it said on the other hand a very high price will rule out use of gas for two of the biggest consumer industries—-fertiliser and power.

Kotak said power and fertiliser plants will shut if gas price is linked to global spot LNG prices. "It would be more economical for India to generate power based on imported coal or imported urea. Our calculations suggest that a well-head gas price of $8-9 per mmBtu should be acceptable to the two sectors".

India, it said, is already paying very high prices for imported LNG and "it would make little sense for Indian customers to pay high prices for imported LNG but not pay a high price (but lower versus spot LNG prices) to domestic producers."

Sources said the EGoM will also consider changing priority of gas allocation by putting power and fertiliser at par. Currently, urea-manufacturing fertiliser plants enjoy top priority in allocation of gas, followed by LPG plants. Power plants are placed third on that list.