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FinMin Asks Oil Min If Gas Price Should Be Capped

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After setting out a formula that could double natural gas prices from next April and agressively pushing for it, the Finance Ministry has written to Oil Ministry seeking "appropriate action" on suggestions for putting a cap to which rates can be raised.
FinMin had suggested a price of around $8.40 per million British thermal units (mmBtu), bringing the price nearer to globally traded prices, in a bid to lift imports of liquefied natural gas (LNG) and spur investment in local output. Betting on policy of hiking gas prices to boost supply and help fix the country's chronic power shortages can go awry unless the debt-laden industry can pass on higher energy costs to consumers or get government subsidies.

The Department of Expenditure in the Ministry of Finance on July 4 sent an office memorandum to the Oil Ministry enclosing two media reports regarding the June 27 decision of the Cabinet Committee on Economic Affairs (CCEA) to double rates to $8.4 from April 1, 2014, asking it to examine the issues raised for appropriate action.

It flagged if a ceiling or limit to which gas prices can be hiked as per the CCEA approved formula of using imported LNG and international hub rates to price domestic gas, be imposed, an official in finance ministry said.

Also, it was flagged that should Reliance Industries, which will be a big beneficiary of rates rising to $8.40 per million British thermal unit, be asked to sell the quantity it has failed to deliver as per its own targets during past three years at current price of $4.2.

"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 rather than getting the benefit of the new price," it wrote.

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The official said the Department had forwarded concerns raised by stakeholders to the oil ministry as suggestions.

The Cabinet Committee on Economic Affairs on June 27 approved pricing of all domestically produced natural gas from April 1, 2014 at an average of the prices of imported liquefied natural gas (LNG) into India and the weighted average of gas prices in North America, Europe and Japan.

The price effective from April 1, 2014 is estimated at around $8.40 per mmBtu, double the price of $4.20 for current gas sales from RIL's KG-D6 block.

This rate is to change every quarter and there were concerns that leaving the formula open-ended may result in prices rising to $10-12 in the near future.

RIL, which had hit a peak output of 69.43 million standard cubic metres per day from KG-D6 block in March 2010, is currently producing just over 14 mmscmd. This output is way short of 80 mmscmd target for this time of the year.

The output in previous two fiscal years was way behind the target.

The new pricing formula, which is based on suggestion made by a panel headed by Prime Minister's economic advisor C Rangarajan, will be effective for five years.

The price for each quarter will be calculated based on the 12-month trailing average price with a lag of one quarter (i.e. price for April to June 2014 will be calculated based on the averages for the 12 months ended December 31, 2013).
Better supplies should help power companies. Gas fuels only about 7 per cent of power stations, but many plants lie idle or operate at low capacity because there is not enough fuel available to keep their turbines running.

Finance Minister P. Chidambaram has already conceded that the government might need to cushion utilities from the gas price increase, which would effectively mean subsidising them. That is a practice India, which is trying to narrow a bloated fiscal deficit, can ill-afford and it leaves power sector reform still at the starting gates.