Rangarajan formula to be a stopgap arrangement

Kelkar committee to suggest changes beyond 2017

The uncertainty surrounding the pricing of domestic natural gas could continue, with the government likely to decide on a stop-gap formula till 2016-17.

The proposed formula, though derived from the C Rangarajan committee’s January recommendations, prices gas at $2.1 less than the panel's suggestion.

The Rangarajan formula would have priced gas at $8.8 a million British thermal unit (mBtu). The new formula takes averages of producer netback for Indian imports for 12 months and the world average netback to producers.

The current price for Reliance Industries Ltd's KG-D6 is $4.2 a mBtu.

The $6.7 price recommended by the petroleum & natural gas ministry will be applicable on gas produced by Reliance Industries Ltd and all other companies, including government-controlled Oil and Natural Gas Corporation (ONGC) and Oil India Ltd. But, if the government decides to revisit the formula after the completion of the 12th Plan period in March 2016, the companies would not be able to gauge returns on investment further.

“Companies plan for a hurdle rate (price of gas or crude where it is viable to produce). They make investment only if they feel comfortable at that rate,” says RS Sharma, ONGC’s former CMD. He says even the Rangarajan panel report recommended a formula for the interim period of three years, after which market pricing should be allowed.

Effectively, the new pricing mechanism for RIL would apply only for three financial years —from 2014-15 to 2016-17. A separate committee, headed by Vijay Kelkar, was working on a road map for gas pricing after 2016-17, said an official.

The initial mandate of the Kelkar panel, set up early this year, was to come up with a road map to enhance domestic oil & gas production and to reduce import dependency by 2030. “Now, the terms of reference for the committee have been changed and there will be a change in Rangarajan’s pricing formula, too, depending on the Kelkar’s suggestions. The period of the committee has also been extended by four months; it will have to submit the report by December this year,” said the official.

The Rangarajan committee report had been facing heat from the ministries of finance, power and fertiliser. Kelkar had recently written a letter to the ministry asking it to put on hold a decision on the Rangarajan panel’s suggestions for conversion to revenue-sharing model, as against the current cost-recovery model.

This will happen only if the Cabinet Committee on Economic Affairs (CCEA) goes ahead with the suggestions of the petroleum ministry. “Transformation from one system to another will add to the confusion already there. If it is fixed for a three-year period only, the whole process will have to be changed again,” said a senior official of an oil producing company.

Incidentally, Kelkar was involved in designing of the New Exploration and Licensing Policy (Nelp), too. RIL’s KG-D6 block was part of the first round of auctions under Nelp.

The petroleum ministry is now batting for a price of $6.775 a mBtu for domestic natural gas, applicable for RIL’s KG-D6 and a host of other fields from April 2014. Moreover, a gas pricing committee would revise the prices on a quarterly basis.

The terms of reference of Kelkar committee also included institutional mechanism for appraisal of Indian sedimentary basins to the extent of 75% by 2015 and 100% by 2025 and utilisation of the Oil Industry Development Board cess, apart from steps for development of gas transportation infrastructure for establishing country-wide market place.

PRICING DILEMMA

• Rangarajan formula: Suggests an interim price reached at by taking averages of global hub prices and cost of imported LNG for the next five years. Price estimated at $8.8 an mBtu
• Slight revision: Ministry makes a slight change, arrives at $6.775 an mBtu by taking averages of average producer netback for imports for 12 months and world netback to producers. Price to be revised quarterly
• Vijay Kelkar panel: Assigned to look into production aspects; after 2016-17 to look at pricing
• Extension: Petroleum ministry to extend Kelkar committee's deadline to give report by four months