While markets are upbeat over the government decision to nearly double the price of domestically produced natural gas, industry wants it to clearly lay the roadmap for free market pricing regime.
The Association of Oil and Gas Operators (AOGO), an industry body that counts Reliance Industries, Oil and Natural Gas Corp (ONGC) and Cairn India as its members, said that the June 27 decision of the Cabinet Committee on Economic Affairs (CCEA) falls short of the recommendations made by the Rangarajan committee.
“The government has announced the pricing policy for domestic gas production going forward from April 1, 2014. AOGO welcomes the effort to create a stability of pricing regime and delinking of gas prices from the demand side issues,” the association said in a press statement.
The CCEA last week decided to price domestic gas at an average of cost of imported LNG and international benchmark prices. The rates as per this formula will be around USD 8 to 8.2 per million British thermal unit in April as against USD 4.2 currently.
“This change of approach was long overdue, and is to be commended. The new prices are likely to make many discoveries of last few years commercial and increase the domestic production,” AOGO said.
AOGO however said the announcement falls short even of what the panel headed by Prime Minister’s economic advisor C. Rangarajan had suggested.
The panel had called for taking price of both long-term LNG contracts as well as spot prices to arrive at domestic rates but the CCEA deleted spot rates from the formula it approved.
“Removal of spot prices from the formula reduces the volume and the correct reflection of imported LNG cost thus affecting domestic producer’s price,” AOGO said.
Also, the Rangarajan Committee had recommended a transition to free market prices in 5 years.
The government announcement after the CCEA decision “is silent on this,” it said, adding that a Vijay Kelkar committee is looking at the transition issues, and its report should be with the government in a few months.
“AOGO strongly hopes that the transition to free market shall start within next year and shall be completed within the 5 year time span,” the statement said.
Stating that free market price was the only way forward, it said: “Future investors shall be willing to take the risk of lower prices, as long as the free market principles and non interference by allocation are observed. The earlier India moves to such a regime, the better it shall be for the country.”