After considerable delay, the empowered group of ministers, headed by External Affairs Minister Pranab Mukherjee has approved, with slight modifications, the pricing formula proposed by Reliance Industries Limited (RIL) for the supply of natural gas from its offshore fields in the Krishna-Godavari (KG) basin. The decision will have far reaching implications. The pricing formula might well become the benchmark for supply of natural gas prospected for and supplied by private producers from the deep water basins. Whether the approved price will be a sufficient incentive for prospective bidders in the forthcoming rounds of the new exploration licensing policy (NELP) remains to be seen, but it is obvious that RIL has more or less secured what it had asked for. As against a $4.33 per million metric British thermal units (mmbtu) proposed by it, the eGOM has fixed $4.2 per mmbtu as the floor price. The composition of the formula is revealing. There is a “fixed” component of $2.5 per mmbtu. Secondly, there is a method for linking the natural gas price to the ruling Brent prices of crude. The third leg of the formula is a positive integer to be quoted by the bidder for natural gas. The approved price of $4.2 covers only the first two components. The eGOM has provided for an additional cushion by lowering the ceiling on Brent crude prices from $65 to $60 a barrel. Given that the current global oil prices are considerably higher and are not expected to come down in the foreseeable future, RIL stands to benefit.
Critics of the government’s decision say that the methodology used to arrive at the price needs greater transparency. Even the Prime Minister’s Economic Advisory Council, which generally approved it, found the methodology opaque in some critical aspects. A stronger criticism has come from the users of natural gas — the power and the fertiliser industries. For them, any shift away from the price control regime will mean a sharp rise in the cost of natural gas, a key input. As has been the case with many other sectors, the opening up of the natural gas industry has brought new challenges to the producers, principal users, and the regulators. There is a strong case for strengthening the existing regulatory framework for the upstream petroleum and natural gas industries. The regulator, whose major task is to reconcile the often conflicting claims of producers and users of natural gas, needs to lay down clear and transparent guidelines that are broadly acceptable to different segments.