Wednesday, Oct 01, 2014

Kelkar panel moots ‘highest possible’ market price for gas

“Market-determined gas pricing should apply to all forms of gas irrespective of the source,” the Vijay Kelkar panel said. “Market-determined gas pricing should apply to all forms of gas irrespective of the source,” the Vijay Kelkar panel said.
New Delhi | Posted: August 29, 2014 6:06 am

At a time a government panel is seized of the gas pricing issue, a committee set up by the previous UPA regime has proposed that natural resources should be priced “at the highest price possible” in the market.

“Market-determined gas pricing should apply to all forms of gas irrespective of the source,” the Vijay Kelkar panel said, in a draft consultation paper submitted to the petroleum ministry recently.

Stating that a pure revenue-sharing regime is not being followed by any major oil-importing country, the panel vouched for continuance of the extant cost-recovery model for exploration and production (E&P) ventures.

The production-sharing contract (PSC), it said, can be based on two alternatives: An investment multiple model with less government intervention or a model that allows for a super-normal profit tax.

The panel’s views are at odds with the petroleum ministry’s recent move to shift to a revenue-sharing model for future oil and gas exploration contracts, including those for deep and ultra-deep acreages. A panel headed by C Rangarajan had earlier recommended the change, saying it would help avoid gold-plating of costs and former finance minister P Chidambaram had in one of his Budget speeches endorsed the idea. So did the Comptroller and Auditor General in 2012.

At present, PSCs allow explorers to first recover all of their capital and operating expenditure before they start sharing profits with the government. An ongoing arbitration between Reliance Industries, the operator of the KG-D6 block, and the government is over the latter’s refusal to full cost recovery of the facility, alleging suppression of gas output by the firm.

Calling for rationalisation of the fiscal regime for hydrocarbon E&P, the Kelkar panel said natural gas should be subsumed in the proposed goods and services tax (GST) and also suggested that import duty on LNG be removed. The proposal should be seen in the context of opposition from states to a proposal to include petroleum products in GST.

The UPA government issued the new gas pricing guidelines based on the Rangarajan formula of arm’s length pricing (which would have nearly doubled the domestic gas price from $4.2/million British thermal units now) but could not implement the plan due to an Election Commission diktat. Current petroleum minister Dharmendra Pradhan said in the Rajya Sabha recently that the new pricing policy would be announced by September 30.

In one of the two PSC models proposed by Kelkar panel, the contract would be linked to the investment multiple, similar to the fiscal construct in the current regime. The model employs the basic elements of the prevalent PSC model — a biddable cost recovery cap (up to 100%) and biddable share of profit petroleum, based on the pre-tax multiple. However, variations in the administration are introduced to address the operational constraints.

In continued…

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