Fearing that the subsidy burden could go out of control in case of upswing in future gas prices, the Finance Ministry has strongly pitched for putting some kind of cap on the prices of natural gas likely to come into effect from April 1, 2014 under the new pricing policy to protect the interests of the consumers.

In its comments on the draft Cabinet note floated by the Petroleum Ministry seeking to notify the new gas pricing regime and also getting nod for the proposal to allow Reliance Industries Limited (RIL) to charge higher prices and furnish bank guarantee for the shortfall in the KG-D6 gas production till it is verified by independent experts, the Finance Ministry said it was important to put a ceiling on the gas price to protect the interests of both the government and the consumers in case there is an unreasonable upswing in the gas prices. The comments are learnt to have the approval of the Finance Minister P. Chidambaram.

Reiterating its official position, which it had conveyed twice to the Petroleum Ministry in July and September this year, Finance Ministry is of the firm view that gas producers cannot be allowed to reap unlimited gains in the case of an upswing in global prices. Any such upside has to be capped, it added. The Fertilizer and Power Ministries have already warned that unprecedented hike in natural gas prices from April 2014 could lead to a much higher outgo of subsidy and the situation could well go out of control.

“In fact, the current price of $4.2 per mbtu was subject to a cap as the cap would come in force once the crude price exceeded $60 per barrel and therefore, there is no ambiguity as to whether the price ceiling is permissible under the production sharing contract (PSC),’’ it said in its comments. The Cabinet had in June 2012, approved the Rangarajan formula for gas pricing to be made effective for five years from April 2014, with a provision for a quarterly provision.

The new formula has yet not been notified as the Finance Ministry had wanted that RIL should be denied the higher gas prices from its existing fields because output had fallen far below what was committed in the approved development plan. Initially, the Petroleum Ministry agreed with the Finance Ministry’s opinion but then last month it moved a revised note, suggesting that RIL be asked to give bank guarantee which can be encashed if it was proven that the company had hoarded gas by deliberately keeping output low.

The Finance Ministry was of the view that since gas is used as feedstock in fertiliser industries and was a raw material for power sector for which the government is bearing subsidy, any upswing buoyed by international volatility in the gas price will add to the subsidy burden of the government.

Similarly, the Finance Ministry is also of the view that a ceiling would also take care of the interest of the gas producers as a downswing in international market may adversely impact their financial fortunes and a ceiling would provide them a much desired stability, officials added.

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