Hike in natural gas price to increase govt's fertiliser subsidy outgo

The incremental revenue for every $1 rise in natural gas prices would be Rs 706.7 crore, while the government would suffer a subsidy loss of Rs 3,155 crore on fertiliser, according to a Cabinet Committee on Economic Affairs (CCEA) note. The power sector, too, would lose Rs 10,040 crore annually, the note said. The Cabinet is likely to take a call on the revision in natural gas prices on Thursday.

According to sources, the government would go for a pricing of $6.775 per British thermal unit (mBtu), below the $8.8 mBtu suggested by the Rangarajan panel, with an option to revise it on a quarterly basis from April 2013. The power and fertiliser ministries have raised their concerns on its impact in their sectors.

According to this formula, the base price of domestic natural gas is supposed to go up to $8.8 per mBtu from the $4.2 currently applicable for Reliance Industries' KG-D6 and a host of other fields.

Sources said the petroleum ministry is batting for an increase of $2.5 per mBtu to $6.775 per mBtu, following the Rangarajan methodology, based on simple average of producers' netback price for Indian imports and world average producers' netback price.

Netback is the total cost of bringing crude oil to the marketplace and the revenues from all the products that are generated from it.

The Planning Commission has suggested a market-based pricing based on import parity pricing of Indian LNG of $10.8 per mBtu. The finance ministry and the Department of Fertilisers, too, have suggested $6.77 and $6.78, respectively. On the other hand, the power ministry is batting for a cost-plus regime with a pricing of $4.4 per mBtu.

Meanwhile, there are allegations that although the Department of Fertiliser's suggestion of taking a weighted average instead of simple average has been mentioned in the note, its demand to factor in the cost of production of natural gas has been ignored.

On the financial implications, the note said the move would increase the financial outgo on urea subsidy. The overall impact of increase in gas price by $1 per mBtu would be Rs 3,155 crore per annum from 2013-14 onwards for 23 million tonnes of urea production, while this is likely to increase to Rs 4,144 crore per annum for 32 million tonnes production by 2017-18.

According to the note, power sector, too, would bleed Rs 10,040 crore a year for every $1 increase, at 70 per cent plant load factor for 28,000 Mw capacity.

"Power prices per unit would rise by Rs 2 per unit based on Rangarajan formula. The fertiliser prices would also increase by Rs 6,000 per tonne. This would cost an additional subsidy burden of Rs 1,50,000 crore for the Centre," said Communist Party of India (Marxist) leader Sitaram Yechury.

According to a Deutsche Bank Markets Research report, every $1 per mBtu increase in the APM (administered price mechanism) gas price adds Rs 1,500 crore to the burden of the national exchequer.

Critics add if the gain for a $2.5 per mBtu price would be minimal for the government, the loss would be around Rs 40,000 crore, especially for power and fertilisers.