While rejecting the formula suggested by the Rangarajan Committee on gas pricing, the Finance Ministry has asked the Petroleum and Natural Gas Ministry to place before the Empowered Group of Ministers (EgoM) an alternative formula based on wellhead prices of suppliers in the region, including the Gulf countries for long-term contracts.
In a note sent to the Petroleum Ministry, the Finance Ministry has stated that for determining the price payable to the producers in India, a simple average is sought of two methodologies.
One talks of prices of imports into India or different supplies, weighted by the total production of those international suppliers. For the second, the average of the prices prevailing of Henry Hub (U.S.), National Balancing Point (NBP), U.K., and Netback wellhead of price of supplies into Japan have been taken. These are weighted with the consumption in the U.S., Europe and Japan.
“There does not appear to be any justification for the said determination of prices, particularly in the context of the specific provision in the production sharing contract, which has led to the need for a price determination by EGoM,” it added.
As regards the international hubs, the Finance Ministry has said there is no logic in inclusion therein of the consumption by Japan, which actually has a very high import prices, and, after the Fukushima disaster, artificially inflates the price. The total consumption of Europe artificially distorts the high NBP price also.
“In any case, when the provision of the production sharing contract (PSC) talks of competitive arms length sales in the region, taking into account any sales of far off regions, and of a low price (like the U.S.) would not be acceptable to the contracts of that PSC. On the other hand, taking the quantity of high price of gas in far off regions such as Europe and Japan would only be detrimental to the Government of India,” the note states.
Further, it said nowhere in the world, have wellhead prices of natural gas been linked to spot LNG contract prices, which are highly volatile and tend to be on the higher side.