Kejriwal's gas price charges: A primer

The process of allocating natural gas and its pricing has come into focus following allegations of irregularities levelled by Delhi Chief Minister Arvind Kejriwal.

What are the factors in consideration here?

Extant price mechanism under the administered price mechanism for gas produced by state-run oil companies is that fixed since June 1 2010 at$4.2 per million metric British thermal unit (mbtu), inclusive of royalty.

The producer was free to market gas but needed to get the pricing formula approved through market determined arm's length pricing. In fact, it was arrived at after Reliance Industries (RIL) invited bids from users and arrived at a price of $4.32 mbtu.

Changes after current pricing policy expires on March 31, 2014:

The government approved a new formula based on recommendations of a committee headed by C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, based on the price of liquefied natural gas (LNG) imports.

This formula takes the weighted average price at major gas trading hubs in Britain, the US and Japan to arrive at a simple average of the prices of LNG imported into India and the average international price. Based on this formula, the current price of domestically-produced gas works out to $6.7 mbtu, which will increase to $8.4 from April 1 when the new policy takes efect.

Reliance Industries:

Regarding higher gas price to RIL from April, the government's approval is subject to the company providing a bank guarantee that will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1 and D3) fields in the eastern offshore KG-D6 block.

The matter is currently in arbitration, with the Directorate General of Hydrocarbons (DGH) claiming a penalty of $1.786 billion to be levied on RIL on this count.

Natural gas output from the block has declined to 14 million standard cubic metres per day from 60 mmscmd at the end of 2010.