In going with the formula recommended by the Rangarajan Committee for pricing natural gas produced in the country — even if it means considerably higher prices — the government has chosen the practical way out of a sticky situation. Gas producers were lobbying hard for ‘remunerative’ prices while users from the power and fertilizer sectors were agreeable only to a nominal increase. With production from the KG basin fields of Reliance Industries, the lead gas producer in the country, falling drastically in the last couple of years due to what the company claims are technical problems, power and fertilizer companies were forced to either use expensive imported gas or operate their plants at sub-optimal capacities. There was thus pressure on the government to incentivise investment in the oil and gas sector by revising prices upwards to meet the expectations of gas producers. The Rangarajan formula links the price of gas in India to world prices. Though it will be lower than the price of imported gas, the new price will nevertheless lead to a sharp rise in input costs for power and fertilizer companies. Mindful of this, the government has already hinted that it will have to subsidise these two sectors for a while.

Even as it examines ways of keeping the burden off consumers, the government needs to rethink two elements. First, if there has to be an international reference point for the Indian gas price, the well-developed Henry Hub market is enough. Gratuitously including Japan and the U.K. in the pricing formula only serves to push the Indian price higher than it ought to be. Second, there must be a ceiling price under the formula. It cannot be that gas producers will reap unlimited gains in the case of an upswing in global prices; any upside has to be capped at a level that takes into account a reasonable return on investment for the gas producer. The government must also subject gas producers to closer regulation, especially on aspects of cost recovery and technical parameters related to production. The ongoing issues with Reliance — which will benefit the most from the higher prices now — over cost recovery and penalties for not meeting contracted output levels need to be taken to their logical conclusion. Once Reliance overcomes the ‘technical difficulty’ of producing gas at the KG-D6 field, the government must ensure the company delivers the shortfall it still owes at the old price of $4.2 per million British thermal unit (mmbtu) rather than getting the benefit of the new price. The government should also consider the other important recommendation of the Rangarajan Committee — of moving to a revenue-sharing arrangement with gas producers. That will eliminate future disputes over cost recovery, even as it discourages gold-plating of project costs.

This editorial has been corrected for a factual error

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