The Prime Minister-appointed Rangarajan Committee has suggested mandating a price of domestically-produced natural gas at an average of international hub prices and cost of imported LNG instead of the present mechanism of market discovery.

The panel, in its report made public on Wednesday, suggested first taking an average of the U.S., Europe and Japanese hub or market price and then averaging it out with the netback price of imported liquefied natural gas (LNG) to give the sale price of domestically-produced gas.

The panel headed by C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, said the PSC provided for arm’s length pricing and prior government approval of the formula or basis for gas pricing, subject to policy on natural gas pricing.

Arm’s length price

“Since no market-determined arm’s length price currently obtains domestically and nor is this likely to happen for several more years, a policy on pricing of natural gas has been proposed,” it said.

“The committee recommended deriving one price from “the volume-weighted netback price to producers at (LNG) exporting country well-head for Indian imports for the trailing 12 months.”

Simultaneously, the volume-weighted price of U.S.’ Henry Hub, U.K.’s NBP and Japan Custom Cleared prices for the trailing 12 months be calculated.

“The arm’s length price thus computed as the average of the two price estimates would apply equally to all sectors,” it said.

The suggested formula

will apply to pricing decisions made in future, and can be reviewed after five years. On the future exploration contracts, it said “a close scrutiny of costs becomes critical for the government since there is incentive for contractors to book as cost expenses that do not reflect the true economic cost to the contractor (for example, through transfer pricing)”.

Stating that cost recovery is at the root of the problems experienced, it proposed to dispense with it, in favour of sharing of the overall revenues of the contractor, without setting off any costs.

“The share will be determined through a competitive bid process for future PSCs,” the report said. The committee has also recommended that an extended tax holiday of 10 years, as against 7 years already available for all blocks, be granted for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500 metres, since the cost of a single well can be as high as $150 million.

Further, the committee has recommended extending the timeframe for exploration in future PSCs for frontier, deep-water (offshore, at more than 400 m depth) and ultra-deep water (offshore, at more than 1,500 m depth) blocks from eight years to ten years.

‘CAG has power to audit oil & gas blocks’

“Audit is prerogative of CAG and so the power of audit remains with CAG,” C. Rangarajan said after the report of the panel, headed by him, was made public.

The comments come in the backdrop of intense bickering over the scope of CAG audit of Reliance Industries’ spending on the flagging eastern offshore KG-D6 gas fields.

RIL has argued that while it is open to CAG doing a financial scrutiny as provided, the production sharing contract does not provide a performance audit by the official auditor.

Dr. Rangarajan said blocks with low value could be audited by panel of auditors formed by CAG and for high value blocks, the official auditor should audit directly.

The CAG had the power to decide the value of the block that would be audited by it directly, he said.

In its report, the Rangarajan Committee has suggested shunning the present cost recovery model that allows operators like RIL to first recover all their investment before sharing profits with the government.

This model had come in for criticism from CAG which said it encouraged companies to keep raising cost to defer higher profit for the government.

“We want to move from the present format of contracts,” he said adding the present system had run into lot of dispute.

These disputes have led to delay of implementation of contract, he said adding under the new system both the government and the contractor would have revenue share from day one of production.

For the future, the panel suggested bidding out the blocks based on the highest production share offered. —