India’s Cabinet clears new price formula for undeveloped gas finds
The new pricing formula, based on market realities, will provide incentive for exploration companies to exploit hitherto undeveloped deep-sea discoveries, and help increase domestic gas productionUpdated: Mar 10, 2016, 12:37 IST
In a boost to companies such as ONGC and Reliance Industries, the Union Cabinet on Thursday approved a new price formula for their undeveloped gas discoveries in difficult areas, which will lead to a near-doubling of rates.
While domestically-produced gas is currently priced at an average of rates in gas-surplus countries like the US, Canada and Russia, the Cabinet Committee on Economic Affairs (CCEA) approved a price indexed to cost of alternative fuels -- naphtha and fuel oil as well as imported LNG -- for deep-sea discoveries that are yet to be developed.
Oil minister Dharmendra Pradhan said the price will be the lowest of weighted average of fuel oil and imported LNG or weighted average of fuel oil, naphtha and imported coal.
With the current rates, the price of gas will come to $7 per million British thermal unit (mmBtu).
Gas price in India is currently at $3.82 per mmBtu, which will fall to $3.15 in April, a rate not enough to make up for the cost of deep-sea development, according to the companies.
Since this rate is not enough to incentivise exploration, the government approved the new price formula for undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure areas using average of landed price of naphtha, fuel oil and liquefied natural gas (LNG), Pradhan said.
About two dozen discoveries of the state-owned ONGC, Reliance Industries and the Gujarat State Petroleum Corporation (GSPC) in KG Basin alone are languishing for want of right (read adequate) price.
The new price will apply to undeveloped gas discoveries and not on currently producing fields,” Pradhan said.
Finance minister Arun Jaitley had in Budget 2016-17 announced a two-stage gas pricing freedom.
“India is blessed with rich natural resources, including oil and gas. However, their discovery and exploitation has been below our potential,” he had said in his Budget speech.
With near stagnation in domestic production and consequent rapid increase in imports, “the government is considering incentivising gas production from deep-water, ultra deep-water and high-pressure, high-temperature areas, which are presently not exploited on account of higher cost and higher risks,” he said.
“A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels,” he said.
The Economic Survey, too, had rooted for market-determined arm’s length pricing for domestic gas. Arm’s length price refers to the prevalent market price or a price that is derived in line with market realities.