FAI pitches for continuing with 2007 gas price formula

In an innovative suggestion, the Fertilizer Association of India (FAI) has suggested that the government use the existing formula based on which a rate of USD 4.2 per mmBtu was fixed for Reliance Industries' KG-D6 block, for deriving a new gas price.
RIL had in 2007 framed and submitted a pricing formula using which the government fixed USD 4.2 per million British thermal unit (mmBtu) as price of gas for five years of KG-D6 production. This price was arrived at by capping oil price at USD 60 per barrel.
Now, FAI, which is part of the consultations that the government is doing with stakeholders for arriving at a new rate, has suggested that the same formula be used and a new gas rate be calculated by removing the cap of USD 60 per barrel.

At USD 100 per barrel oil price, the gas price, using this formula, will come to less than USD 5 per mmBtu.
"It is our considered view that the existing pricing formula for gas produced under NELP approved by EGoM in 2007 should continue including the gas produced under non-NELP with only change that ceiling on price of crude oil in the formula may be removed," FAI wrote to Oil Ministry.
The formula, it said, was suggested by the gas producer (RIL), approved by the government and accepted by consumers. "The price of entire quantity of existing gas should be determined by this formula," FAI Director General Satish Chander said.

The formula approved by an Empowered Group of Ministers in 2007 was valid for five years from date of beginning of production. RIL began gas production from KG-D6 in April 2009.

A four-member panel of secretaries from different ministries is currently holding consultations with stakeholders to work out a new gas pricing mechanism after the Rangarajan formula that doubled rates to USD 8.4 per million British thermal unit, was not acceptable to the NDA government.
In the letter to Rajive Kumar, Additional Secretary, Oil Ministry, who is the member-secretary of the panel, FAI said, "if it is necessary to devise a different formula for production from new wells under NELP where cost of production is likely to be higher, then the major part of price in any new formula should be related to cost of production of such wells."

FAI said a USD 1 per mmBtu increase in gas price translates into an impact of Rs 2,300 crore per year on total cost of production of urea. "This will in turn increase subsidy on urea by the same amount."
On marketing margin, it said additional cost that producers charge for marketing of gas should form part of well-head price. "In absence of such a provision gas sellers are charging marketing margin in a monopolistic and opaque manner."
It also demanded that the gas be priced in rupee and not in US dollars.