The petroleum ministry is caught between ensuring affordable gas supply to state-owned power units and the desire to get a profitable price for new discoveries, given in particular the high cost of exploration and rising global fuel prices.
The need for formulating a pricing formula has gathered urgency with no solutions as yet on how the gas from Reliance Industries' KG basin block should be sold.
The two main off-takers with which the Mukesh Ambani-led Reliance Industries Ltd (RIL) has arrived at a commitment are Anil Ambani's Reliance Natural Resources Ltd (RNRL) and the state-owned power major NTPC Ltd. But the issue of price has held up a firm sale commitment for gas, that is expected to be available in 2008.
To resolve the tricky issue, the petroleum ministry has set up a high-level expert group to formulate a pricing structure within two months.
"Ideally, the market ought to determine the price but as yet the gas market is not mature or organised. Our task is to set a floor as well as a ceiling price and then let the market decide," a senior petroleum ministry official said.
"The finance ministry is keen to enhance its revenues and does not want a situation where the government loses on profit petroleum (revenues after adjusting the cost of exploration and other inputs)," he said.
"Our brief is to devise a formula in two months before the signing of the production sharing agreement for the next round of exploration blocks under the NELP-VI."
In the run-up to finalising the structure, the petroleum ministry has already held talks with some industry players, and many more, including RNRL and NTPC, are being invited to present their position.
"As many as 48 companies and industry groups will be presenting their views over the next few days till Aug 31 as we strive to get the divergent positions of both producers and consuming industries," official sources said.
The large list includes independent power producers, fertiliser associations, the Steel Authority of India Ltd (SAIL), also one of the gas users, various exploration companies like Jubilant, Essar, Hardy, Focus Energy as well as gas infrastructure major GAIL (India) Ltd.
The leading industry lobby, the Confederation of Indian Industry (CII), will also provide inputs on an issue that will determine how the government can resolve the issue of gas pricing, in the light of the fact that some consumers are paying less than others for supplies from the same source.
While most gas produced from exploration blocks of state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) is being sold at lower government fixed prices, other discovered fields in blocks awarded since 2000 under the NELP rounds have been allowed to fix market determined prices.
As yet no open competitive bidding process has been allowed to discover the end price. Though the NTPC received a very competitive price offer from Reliance for gas supplies, the diversified private conglomerate is now seeking to withdraw from its earlier price commitment.
Among the many pricing formulae being studied is pegging the price in relation to imported liquefied natural gas (LNG).
Experts argue that whatever price formula is finalised, industrial users need to be prepared to pay a higher price than in the past given that India is increasingly looking to imports for bridging the domestic gas demand.
Despite some encouraging new discoveries in the eastern coast, Rajasthan and Gujarat, the deficiency gap is unlikely to be bridged.
Further, experts point out that even imported re-gassified LNG is more economical compared to expensive fuels like naphtha. The power and fertiliser industries are, however, not willing to subscribe to that argument.