The Planning Commission has recommended switching to an international pricing formula for natural gas — which now works out to $14.5 per mBtu, almost three times more than the present price of $4.2 mBtu (per million British thermal unit) — by the beginning of the 13th Plan (2017-22). This is in line with the demand made by Reliance Industries Limited (RIL) except that the company wanted it done even earlier, by April 2014.

The Planning Commission has also sought that coal bed methane (CBM) gas and the yet-to-be discovered shale gas be freed from any price control or approvals without any further delay.

The recommendations were conveyed to Petroleum Secretary Vivek Rae and the Prime Minister’s Office on April 5 through an official communication in the shape of comments on the C. Rangarajan panel recommendations. Interestingly, a week after the recommendations, RIL chairman Mukesh Ambani and British major BP Plc head Bob Dudley met Prime Minister Manmohan Singh and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia with the same demand. They sought a road map for gas pricing as the present prices were not attractive enough to make investment commitments.

This demand has faced strong opposition from the Fertilizer and Power Ministries as well as power producers who fear that switching to international pricing would lead to a massive hike in power tariffs and hefty rise in fertilizer prices and subsequently put a huge financial burden on the government in the form of fertilizer subsidy.

The Commission feels the Rangarajan panel’s formula for natural gas price at $8.5 mBtu should be viewed as an interim or transitional solution valid up to the 12th Plan (March 31, 2017) and applicable for all existing contracts. “Post the latter date, the Empowered Group of Ministers may review the price formula towards alignment with international prices. For the new contracts, which go into production after March 2017, the producer should be free to market gas to any domestic buyer at a market-determined price. The details of the regime for new contracts need to be spelt out only when new bids are invited. Since the structure of the new contracts is being examined by the Vijay Kelkar Committee, the pricing issue could also be remitted to the committee,” the note sent by Anil K. Jain (Adviser, Energy) states.

It says the existing New Exploration Licensing Policy (NELP) contracts could be allowed to market 10 per cent of production freely to willing buyers, with the percentage increasing by 5 percentage points each year. On this basis, gas produced from the existing contracts would be 50 per cent free after 8 years. A mechanism for sharing risk in the event of excessively high or excessively low prices can be built into future contracts.

The note further states that new NELP contracts (as well as those signed after the sixth NELP round) entered into from now onwards will begin commercial production only by the beginning of the 13th Plan. “They should be assured market-based pricing. If the government wishes to subsidise any particular use, it should do it from their profit share,” the Commission adds.

Talking of fixing of gas price, the Commission note states that “it is tempting to think that by choosing a lower price, we are assuring consumers and the economy of the same amount of gas supply at a lower price.” The fact is that the price formula affects the investment that will be undertaken in exploration and production and therefore the total volume of gas likely to be produced. It will also affect the share accruing to the government. “As a general rule in the policy for the 12th Plan, energy prices should be aligned with global prices, especially when large imports are involved. In any case, if the government wishes to subsidise any particular use [e.g. fertilizer] it is better to do so from the royalty and profit share which will be higher if gas prices are free,” it argued.

Keywords: gas pricing