FM hints lowering gas price for fertiliser, power sectors

CCEA hiked the gas price from $4.2 to $8.4 mmbtu yesterday

A day after the Cabinet approved nearly doubling of natural gas prices to about $8, Finance Minister P Chidambaram today hinted at moderating the price of fuel to power and fertilizer sectors so as to keep electricity and urea costs down.

The increase in current gas price of $4.2 per million British thermal unit will result in sharp rise in cost of producing power and fertilizer as well as rates of CNG for automobiles.

The Finance Minister said the Cabinet Committee on Economic Affairs (CCEA) had yesterday approved pricing of all domestic gas as per a formula suggested by a panel headed by Prime Minister's economic advisor C Rangarajan, to spur investments without which domestic production would have declined and imports have risen.

'The power and fertiliser ministries have raised the issue,' Chidambaram told reporters briefing decisions of the CCEA.

'We can look at fixing the input costs for these sectors. The issues will be addressed in course of time,' he said without elaborating.

Asked if his statement meant that the government will subsidise gas supplies to power plants and fertilizer units, he said the CCEA has given output price of gas producers and not the input price of consumers.

'Input price of gas will be fixed in course of time,' he said.

While producers will get a price determined by the Rangarajan formula, user industries of power and fertilizer may get gas at lower price with government subsidising the difference.

Chidambaram said investments in India were declining and companies were investing abroad. In past 10 years, $27 billion investment has flown out and antoher $10 billion is in pipeline.

In absence of remunerative prices, no investment has been made in domestic exploration and production, resulting in fall in natural gas production from 143 million standard cubic meters per day in 2010-11 to 111.44 mmscmd in 2012-13, Chidambaram said, adding fall in domestic output meant that imports of liquid gas (LNG) rose sharply.

'Only way to correct this is to give reasonable price which will attract this investment,' he said. 'For every unit of gas that we do not produce, it does not mean we are not consuming that gas. We are importing that one unit.'

Imported gas price is three times the domestic gas rate and importing gas was unsustainable for Indian economy, he said.

'The choice is to live without gas or to produce gas because third alternative to import is simply not sustainable,' he said.

The new price will apply uniformly to all producers, be it state-owned firms like Oil and Natural Gas Corp (ONGC) or private sector Reliance Industries. While it was previously said the new rates would apply to regulated or APM gas produced by firms like ONGC immediately, the pricing as per Rangarajan formula will come into effect from April 1, 2014, just when RIL's KG-D6 formula of $4.2/mmBtu runs out.

The Rangarajan formula would be applicable for five years.

The Rangarajan formula uses long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India. However, the CCEA changed the formula to price the gas at an average of long-term LNG price and internatinal trading benchmarks.