FinMin wants a ceiling on gas price increase

Also asks OilMin to see if RIL can be made to meet supply shortfall at old price

The finance ministry has written a letter to the petroleum ministry, asking it to consider putting a cap on the increase in domestic gas price when the pricing formula suggested by the Rangarajan panel is implemented from April 2014.

In a letter dated July 4 — based on some newspaper editorials on June 29 — the finance ministry has also said it should be examined whether it is possible to ensure that Reliance Industries Ltd (RIL) delivers its current supply shortfall at the old price of $4.2 per million British thermal unit (mBtu) and does not get undue benefit of an increased price. It adds that this can be applicable after the “technical difficulty” has been overcome.

Reacting to the news, the RIL stock fell 3.89 per cent from its previous close on BSE to Rs 839.40, before recovering to close 1.95 per cent lower at Rs 856.35.

According to estimates, the price could be raised to more than $8 an mBtu from April 2014 after taking into account the average of benchmarks like Henry Hub, National Balancing Point, the netback price at supply sources for Japan and the netback price of Indian LNG imports.

“There must be a ceiling price under the formula. It cannot be that gas producers will reap unlimited gains in the case of an upswing in global prices; any upside has to be capped,” the letter, from the department of expenditure of the finance ministry, says.

However, the petroleum ministry has denied any change in the pricing or dual pricing for undelivered gas after April 2014. “Regarding gas prices, a decision has already been taken. There is no question of rethinking on this,” a senior petroleum ministry official told Business Standard. Regarding Reliance, the finance ministry added the ongoing issues with RIL — which will benefit the most from higher prices — “over cost recovery and penalties for not meeting contracted output levels need to be taken to a logical conclusion”.

The Cabinet Committee on Economic Affairs had cleared the new pricing formula for domestic natural gas on June 27.

The suggestion on RIL could have come because about 25 power plants are running short of gas due to a decline in the company’s production from its KG-D6 field to 15 mscmd, compared with a target of 80 mscmd. The production has fallen from a 2010 high of 61 mscmd. The allocation for the power sector from KG-D6, which was likely to be 29.7 mscmd, has fallen to zero for the sector at present.

The finance ministry’s letter also wanted a closer regulation, especially on the aspects of cost recovery and technical parameters related to production. Announcing the price rise, Finance Minister P Chidambaram had hinted about a separate input pricing for power and fertilisers. “This is just the output price of gas. In course of time, the concerns of the power and fertiliser sectors will be addressed,” he said.