Chidambaram says the choice is to live without gas or produce it

The recent gas price hike may not necessarily lead to a corresponding increase in power and fertilizer prices, Union Finance Minister P. Chidambaram said on Friday.

“At the moment we are fixing only output prices, the price payable to gas producers,” Mr. Chidambaram said. “This will indeed have an impact on the consumer, but those prices are not being fixed today. The price that power and fertilizer companies will pay is not being fixed now. What is the price at which it should be supplied to a power plant, to a fertilizer plant in order to make power affordable, fertilizer affordable... that can still be decided between now and April 1.” He said the government was conscious of the need to keep power and fertilizer prices low. “It could be tweaking prices or it could be bearing an additional subsidy. There are various methods but at the moment we are not addressing those issues.”

The CCEA meeting that approved the new pricing took an unusually long time and saw Ministers raising objections. According to the Rangarajan formula, valid for five years, gas rates will change every quarter based on cost of imports and international hub rates. The Power and Fertilizer Ministers had vehemently opposed the hike stating that it would lead to the cost of generating electricity spiking to Rs. 6.40 per unit from Rs. 2.93.

Mr. Chidambaram said, in the absence of remunerative prices, no investment had been made in domestic exploration and production, resulting in a fall in natural gas production from 143 million standard cubic metres per day in 2010-11 to 111.44 mmscmd in 2012-13. This in turn meant a sharp rise in imports of LNG which was expensive.

Imported gas price was three times the domestic gas rate and importing gas was unsustainable for the Indian economy. “The choice is to live without gas or to produce gas because the third alternative to import is simply not sustainable,” he said.

The new price will apply uniformly to all producers, be it state-owned companies like Oil and Natural Gas Corporation (ONGC) or Reliance Industries Limited, he added.

While it was previously said the new rates would apply to regulated or APM gas produced by firms like ONGC immediately, the pricing as per Rangarajan formula will come into effect from April 1, 2014, just when RIL’s KG-D6 formula of $4.2/mmBtu runs out.