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CCEA To Consider Doubling Gas Price On 27 June

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The Cabinet on 27 June will consider doubling the natural gas prices to $8.42 even as the first revision in 3 years faces stiff resistance due to resultant increase in electricity tariff and fertiliser cost.

The Oil Ministry's proposal to price all domestically produced natural gas as per a complex international hub and imported LNG-based formula suggested by the Rangarajan panel is listed as item number 8 on the agenda of Cabinet Committee on Economic Affairs (CCEA) meeting scheduled for tomorrow.

The price formulation is to come into effect from April 1, 2014 for all domestically produced gas - be it that of state-owned companies like ONGC or private firms like Reliance Industries, and rates will be revised every quarter till 2017 when prices will be completely freed, sources said.

The price of gas if CCEA accepts the proposal will be $8.42 per million British thermal unit as opposed to $4.2 currently. The rates are higher than $6.775 that the Ministry had been propagating to temper opposition.

Sources said power and fertiliser ministries have opposed the move as it would result in cost of electricity generation rising to unviable levels and steep jump in urea subsidy.

Left parties have alleged that Oil Minister M. Veerappa Moily is trying to help RIL by proposing a steep hike.

The CCEA, some government insiders say, may not accept the Oil Ministry's proposal of revising prices every three months based on quarterly average of international hub and imported gas (LNG) price.

It may approve a 'moderate' revision but put a cap or ceiling of no more than $7 per mmBtu as it would be not advisable to have a fuel cost with cascading impact on the economy, change every quarter and that too based on international volatility.

Sources said there was also a possibility of the issue being referred to a ministerial panel for wider consultation.

The Oil Ministry has reasoned that the increase in gas price was need to incentivise exploration while also resulting in higher revenues to the government. Every dollar increase in gas price would result in $128.5 million (Rs 707 crore) in additional royalty and profit petroleum.

Sources said even in 2007 when $4.205 per mmBtu was fixed as the price of gas that RIL had planned to produce from KG-D6, the government had exercised its discretion to modify the formula suggested by the private firm and imposed a cap.

The price was at that time lowered from $4.34 sought by RIL and capped at $4.2 for the first five years of production.

The CCEA may decide on similar lines tomorrow.

The power ministry has opposed any hike saying electricity generation at any price of over USD 5 was economically unviable. Also, it has questioned the need to price the fuel in US dollars as any depreciation in the Indian currency would further add to the strain on the consumers.

Sources said the variable cost of generating electricity would be around Rs 5.40 per kilowatt hour (per unit) at new gas price, taking the total cost of generation to Rs 6.40 per unit. This compares to current cost of Rs 2.93 a unit.

The outgo for every $1 increase in gas price will be up to 1.138 billion (Rs 6,260 crore). Outgo for fertiliser sector due to $1 increase in gas price will be $406 million (Rs 2,233 crore).

The Fertiliser Ministry has shot off a letter to the oil ministry saying it had never supported an increase in gas price as was being brought out in the note oil ministry moved for consideration of the CCEA.


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