The Union Cabinet will soon decide on putting a cap or limit on hikes in natural gas prices following a new pricing formula coming into effect from April 1, 2014, Oil Secretary Vivek Rae said on Wednesday.
The Union Cabinet had in June decided to price all domestically produced natural gas at an average of the price prevailing at international gas trading hubs and the actual cost of importing liquid gas (LNG). The pricing formula will be effective from April 1, 2014 for a period of five years, with the price being revised quarterly.
The price for each quarter will be calculated based on the 12-month trailing average price with a lag of one quarter (i.e. price for April to June 2014 will be calculated based on the averages for 12 months ended December 31, 2013).
Using the approved price formula, the price effective for April 1, 2014 is estimated at around USD 8.40 per million British thermal unit, double the current price of USD 4.20. Both Finance Ministry and Power Ministry have sought cap or upper limit to which rates can be raised so as not to put excessive burden on consumers like electricity stations.
“Suggestions have been made that there has to be cap on the price. And there is also a suggestion that we should exclude spot (LNG) deals from the formula because they are very volatile... Cabinet will take a decision (on these) shortly and we will notify the gas pricing formula,” Mr Rae told reporters on sidelines of a CII event here.
He, however, said there was no question of going back on the decision to revise prices. “There is no possibility of revision in formula. The only thing is whether to include or exclude spot (LNG) transactions and whether to have a cap or not.”
While the Finance Ministry wants a ceiling price under the formula as gas producers will reap unlimited gains in case of an upswing in global prices, the Power Ministry feels any price of more than USD 5 will lead to electricity generation cost which cannot be absorbed by consumers.
Asked how soon the Cabinet would decide on the issue, he said, “may be in a week or 10 days.”
The new gas price formula has not been notified so far also because of a dispute over whether Reliance Industries should get the new rates considering the fact that it has not produced as per pre—stated targets from eastern offshore KG-D6 block, he said. The Cabinet will also decide if RIL be paid USD 4.2 for currently producing fields till the shortfall is met or the charges that it hoarded gas are proved wrong.
Alternatively, RIL may be allowed higher gas price provided it gave a bank guarantee equivalent to the incremental rate. The bank guarantee will be encashed in case it is proved that RIL deliberately produced lower than target, he added.