In a move that hopes to boost exploration and investor sentiment,the UPA government Thursday approved an increase in the price of natural gas effective from April 2014,in line with a complex pricing formula suggested by the Rangarajan Committee.
But the decision is also expected to lead to higher power tariffs and a jump in the prices of urea,CNG and PNG.
The final price of natural gas in each quarter from April 2014 will depend on the long-term and spot LNG imports of the previous quarter.
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But the petroleum ministry has indicated that it is likely to be at least $8.55 per million British thermal units (mBtu) from the present $4.2 per mBtu,considering the high cost of Australian LNG imports and the higher price of Qatari gas from January 2014.
Despite stiff resistance from the fertiliser and power ministries,the general consensus was that this announcement would boost investor sentiment necessary for the Indian economy, a petroleum ministry official said after the Cabinet Committee on Economic Affairs cleared the proposal.
Foreign direct investment has dwindled and foreign institutional investors have walked away from the country resulting in the rupee falling to 60.19 to a dollar. Earlier this month,Finance Minister P Chidambaram had identified an increase in gas price as among the measures that would revive investor confidence.
But the revision is bitterly opposed by the power and fertiliser ministries as well as opposition Left parties. The oil ministry has reasoned that an increase was needed to make exploration attractive and bring higher revenues to the government.
The power ministry opposed the increase saying electricity generation at any price of gas higher than $5 per mBtu would be economically unviable. It also questioned the need to price the fuel in US dollars as any depreciation in the Indian currency would further burden consumers.
It was earlier estimated that the price of natural gas could be increased to $6.77 per mBtu.
Based on this indicative price,the fertiliser ministry had said the blow would be worse for nearly 12 crore farmers as they would have to pay 65 percent more for urea – Rs 8,892 per tonne from Rs 5,360 per tonne. Or the government would have to shell out an extra Rs 6,357 crore per year as subsidy.
GAIL had also used this estimate of $6.77 per mBtu and warned on Wednesday that the retail price of piped natural gas,compressed natural gas and lean gas sold to small and medium entrepreneurs would rise by at least 50 percent.
The only relief for the fertiliser and power ministries at the CCEA meeting was that the formula – devised by the Prime Ministers economic advisor C Rangarajan – would be in place for five years until 2019 as opposed to the petroleum ministrys proposal that the market should be freed after 2017.
The new price will apply uniformly to all producers and will be passed on to consumers be it state-owned firms such as Oil & Natural Gas Corp or the private sector Reliance Industries. The Rangarajan formula would come into effect just when RILs KG-D6 formula of $4.2 per mBtu runs out.
While RILs KG-D6 gas price was fixed in 2007 at $4.205 per mBtu for the first five years of production,the administered price mechanism (APM) gas rate was last revised in June 2010 when it was raised to $4.2 from $1.79. RIL began production from its eastern offshore KG-D6 field in April 2009.
APM gas accounts for about 60 per cent of current domestic production of about 110 million standard cubic metres per day. RIL produces about 14 MSCMD.