New gas pricing formula notified

The ministry of petroleum and natural gas on Friday notified the new natural gas pricing formula, which would almost double the domestic natural gas price from the current $4.2 a million British thermal units (mBtu).

The prices would be applicable to both conventional sources, as well as shale and coal bed methane, from April 1 onwards. It was on June 27, 2013 that the Cabinet Committee on Economic Affairs cleared the new gas pricing based on a formula suggested by a panel headed by the Prime Minister's Economic Advisory Council Chairman, C Rangarajan, in December 2012.

The Rangarajan committee had proposed by taking an average of the US, Europe and Japanese hub prices and then averaging it out with the netback price of imported liquefied natural gas to give the sale price of domestically-produced gas. It was in May 2010 that the price of administered gas was more than doubled from its previously subsidised level of $1.8 per mBtu to $4.2 per mBtu, taking it up to the level of Reliance India Ltd's (RIL's) KG-D6 prices.

The major gainers of a price rise include state-run ONGC, OIL, RIL and Cairn India. According to the formula, the pricing is expected to be in the range of $8.2-8.4 per mBtu in April 2014.

The new prices would be revised on a quarterly basis, taking into account the 12-month average of global rates and LNG import price with a lag of one quarter. The ministry in a statement said that according to the government decision on December 19 last year, the prices would be applicable to the D1 and D3 gas discoveries by Reliance Industries in KG-D6, subject to submission of bank guarantees that will be notified separately.

However, these guidelines will not be applicable where prices have been fixed contractually for a certain period of time, till the end of such a period. For D1 and D3, the bank guarantee will be equivalent to the incremental revenue that RIL will get from the new gas price. This would be encashed if it is proved that there is an intentional hoarding of gas from KG-D6. The government would appoint a three-member committee to look into the production and bank guarantee of gas from D1 and D3 on a quarterly basis.