Govt frees diesel, raises gas price

With a 33% jump, natural gas prices will now stand at $5.61 per mBtu; new rate to take effect from November 1

The government on Saturday took a step forward on fuel pricing by approving a 33 per cent jump in natural gas prices to $5.61 per mBtu and by decontrolling the price of diesel.

This is the first reduction in diesel rates in about five years. Diesel rates were last cut on January 29, 2009, by Rs 2 a litre to Rs 30.86. Diesel prices were last raised by 50 paise on September 1. 

The gas price hike will impact power and fertiliser prices, apart from piped gas consumers. The switchover from government-dictated diesel rates to market pricing immediately reduces diesel prices by Rs 3.37 a litre in Delhi. Diesel prices will henceforth be exposed to the volatility in global crude oil prices.

"The price of natural gas now fixed is $5.61 per mBtu. This takes into account the fact that there is sufficient incentive for drilling and investment and is also not excessively burdensome for consumers," Finance Minister Arun Jaitley told mediapersons after a meeting of the Union Cabinet.

Every dollar increase in the price of gas pushes up urea production costs by Rs 1,370 a tonne, power tariffs by 45 paise a unit, compressed natural gas (CNG) prices by Rs 2.81 a kg and piped natural gas (PNG) prices by Rs 1.89 a standard cubic metre (scm). After Saturday's decision, CNG prices will increase by Rs 4.25 a kg and PNG prices will rise by Rs 2.60 per scm, according to Indraprastha Gas Ltd (IGL).

"We will try and absorb this increase and request state governments to moderate taxes so that consumers are not affected by the price rise," Jaitley said. The new gas price, based on a modified Rangarajan formula, will be implemented from November 1, 2014, and will be reviewed every six months. The revised price will be applicable to all gas produced from nomination fields of ONGC and OIL India, Nelp blocks, some pre-Nelp blocks and CBM blocks.

While the earlier gas pricing guidelines were based on the recommendations of the Rangarajan committee that favoured doubling of rates to $8.4 per mBtu, the new price has been derived from a modified Rangarajan formula. The new formula eliminates both the Japanese and Indian LNG import components and adds new indices - Alberta Gas Reference price in place of Henry Hub and Russian actual price in place of National Balancing Point for Russian consumption.

CABINET DECISIONS AND IMPACT

DIESEL

• With diesel prices deregulated, prices in Delhi stand reduced by Rs 3.37  a litre from Saturday midnight

GAS PRICING

• The Rangarajan formula on gas pricing changed
• New price will be $ 5.61 per mBtu, against the current $4.2 and $8.4 suggested by the Rangarajan panel
• CNG prices to increase by Rs 4.25/kg and PNG ones by Rs 2.6/scm. Govt oil companies to absorb as much as they can
• Centre asks states to moderate taxes on gas so that consumers  don’t bear the brunt

DIRECT BENEFITS TRANSFER

• DBT scheme to be relaunched for LPG cylinders in 54 districts from November 10 and then across the country
• Those having Aadhaar or bank  accounts to get LPG subsidy via DBT; those not having either will get subsidised cylinders

With the decontrol of diesel, its prices will follow in the footsteps of petrol, the other automobile fuel that was freed from government intervention in 2010. The United Progressive Alliance government had decided to raise diesel prices in monthly instalments of 50 paise until retail prices were aligned with the market. Prices have risen by cumulative Rs 11.74 per litre in 19 instalments since January 2013.

Diesel accounted for over 45 per cent of the oil companies' gross under-recoveries of Rs 139,869 crore on sale of subsidised fuel last fiscal year. Owing to the complete elimination of losses now, the government's diesel subsidy is expected to be shrink significantly in the current fiscal.

"Diesel decontrol will facilitate greater competition in the retail segment and benefit consumers. The competition is also expected to foster greater efficiency in oil companies," an official statement said.

The Cabinet also approved modified cash transfers for cooking gas, which is being re-launched in 54 districts next month. In the new scheme, the subsidy will be fixed for every cylinder and all consumers will receive cash by linking their Aadhaar number to their bank accounts.