Ranga panel formula for gas pricing too complex

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The Rangarajan committee is believed to have suggested a complex pricing formula that will lead to near doubling of natural gas price to about $8.

However, it is unclear if this will override the price discovery mechanism set out in current oil and gas contracts.

The six-member panel, which submitted its report to the prime minister’s office on December 20, is believed to have suggested pricing of natural gas based on weighted average of the fuel in North America, Europe and Japan markets as well as imported liquefied natural gas (LNG).

Sources said the panel has suggested bringing gas-on-gas competition in five years, which essentially means deregulation of the sector. In the run-up to that, it wanted domestically produced gas to be priced based on a complex weighted average formula.

The formula translates into a gas price of just over $8 per million British thermal unit compared to the current rate of $4.2 per mmBtu for most of the gas produced in the country.

The panel headed by prime minister’s economic advisory council chairman C Rangarajan was tasked to suggest design of future contracts for exploration and production of oil and gas as well as basis or formula to price domestically produced gas.

Sources said it was unclear if the suggestion of the panel can override the arms-length price discovery set out in the production sharing contracts (PSCs) signed by companies like Reliance Industries. Under current PSC, a contractor is required to discover an arms length price of gas by calling bids from prospective users.

If Rangarajan committee has actually suggested a firm basis for pricing of the gas, then it would tantamount to the government taking up the role of fixing of the price as well. The government currently fixes users of the fuel and only approves a price discovered by companies.

The panel suggested sweeping changes in future oil and gas contracts by ending the controversial system of oil firms first recovering their costs from sale of oil and gas before sharing profits with the government. This system had come in for criticism from national auditor CAG, which felt it encouraged explorers to keep increasing cost so as to defer higher profits to the government.

Sources said the panel suggested moving to a production-linked payment regime where explorers will be required to bid for the government share of production after royalty. The firm offering the maximum would win a block or area. The panel has also felt that in the existing PSC system with liberal cost recovery provisions, the government take comes at a relatively later stage.

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