Prices could double by 2014 leading to hike in power tariff and fertilizer cost

Despite opposition from within the Cabinet and outside, the Manmohan Singh government on Thursday approved a doubling of natural gas prices from the present $4.2 mbtu to $8.4 mbtu from April 1, 2014. Many experts feel the increase would likely lead to a hike in power tariffs, increase fertilizer cost and make CNG transportation more expensive.

In the Cabinet meeting, some ministers objected to the hike when gas production from the KG D6 block had been consistently falling and asked why no action was being taken to arrest that fall.

As a result of the hike, power tariffs are likely to go up by Rs. 4.70 per unit for gas-based plants and by almost 16 to 20 paise in other cases.

Earlier last week, the Government allowed the pass-through mechanism for the power sector providing for passing on to the consumer through a tariff hike any increase in costs due to import of coal.

“The CCEA has approved $8.4 mbtu as the new gas price to be effective from April 1, 2014,” Petroleum and Natural Gas Minister Veerappa Moily told newsmen after the conclusion of the CCEA meeting.

Rangarajan formula

The Cabinet Committee on Economic Affairs, headed by Prime Minister Manmohan Singh, went along with the Rangarajan Committee formula and the demand made by Mukesh Ambani-owned Reliance Industries Limited (RIL) for doubling, thus bringing them on a par with the international price of LNG. The CCEA has decided to overlook the $6.775 mbtu proposed by the petroleum ministry and has instead opted for the Rangarajan formula advocated by the finance ministry and planning commission. The Rangarajan formula would be applicable for five years.

The new $8.4 mbtu price, which will be reviewed every three months, will apply to all the gas producers uniformly including state-owned firms like Oil India Limited (OIL) and Natural Gas Corporation (ONGC) and private companies like RIL. The Rangarajan Committee had used a formula of long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India. While the Rangarajan panel had recommended revising domestic gas prices every month, the CCEA has opted for a quarterly revision.

The price of gas in April next year when these guidelines will come into effect would be around $8.42 and over $10 in the following year. This is because Petronet’s deal with Qatar’s RasGas has a price-cap which lifts in January 2014, linking gas prices fully with crude. RIL gas rates were fixed in 2008 at $4.2 for the first five years. Later, APM rates were revised in June 2010 when prices were raised to $4.2 from $1.79.

The revision of gas price beyond the $5 mbtu mark was strongly opposed by the power and fertilizer ministries as well as the Left parties. The two ministries were of the view that any price hike beyond this figure would badly impact the power and fertilizer sectors and lead to massive hikes in power tariffs and prices of fertilizers. Left parties termed it as a move by the petroleum ministry to help RIL. However, the petroleum ministry argued that this price hike was needed in order to attract investments in the oil and gas sector and give a big fillip to domestic production and exploration activity. An increase of one dollar in gas price would result in $128.5 million (Rs. 707 crore) in additional royalty and profit petroleum.

Outgo

The variable cost of generating electricity would be around Rs. 5.40 per per unit at the new gas price, taking the total cost of generation to Rs. 6.40 per unit. The outgo for every $1 increase in gas price will be up to $1.138 billion (Rs. 6,260 crore). The outgo for the fertilizer sector due to a $1 hike in gas price will be $406 million (Rs. 2,233 crore).

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