The committee has recommended factoring in the domestic cost of production

The Standing Committee on Petroleum and Natural Gas has sought a review of the Rangarajan formula for gas pricing, saying that the price should be fixed after factoring in the domestic cost of production.

The committee, in a report tabled in Parliament, said the proposed formula is a simple average of two methodologies— price of imports of LNG into India by different suppliers and weighted average of prices of natural gas prevailing at Henry Hub in USA, National Balancing Point (NBP) in London and netback import price at the well head of suppliers into Japan. “It is to be observed that the benefit of lower gas price at Henry Hub has been largely diluted by the inclusion of Japan's liquefied natural gas prices, which includes 60 per cent royalty component linkage to Japanese Crude Cocktail and host of other factors,” it said.

The panel, headed by Andhra Pradesh MP Aruna Kumar Vundavalli, was of the view that Russia, which exports 40 to 50 per cent of its gas to Europe at a price of about $8.77 per mBtu, could be a better indicator of gas price. Russia is the world's second largest gas producer and consuming country in the world and its prices could be incorporated as one of the reference price in the pricing formula, it said.

The committee also pointed at omission of domestic cost of production of natural gas, which ranges from $2.48 to $3.63 for private and public sector firms, in the formula. “The Rangarajan formula for calculating the natural gas price from April next year should be thoroughly reviewed and re-considered. The committee has recommended factoring domestic cost of production of gas for arriving at the price, and fixation of price of gas in rupee terms,” the report added.

According to the Rangarjan pricing formula, the price will be revised quarterly. Prices 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 average for 12 months ended December 31, 2013). Using the approved formula, gas price in April-June is estimated at $8.2-8.4, nearly double the current selling price of $4.20 per mmBtu.

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