Oilmin’s gas pricing model hits North Block roadblock Finance ministry believes market not mature enough yet

Oilmin’s gas pricing model hits North Block roadblock Finance ministry believes market not mature enough yet

Dashing the hopes of domestic natural gas producers, the finance ministry has stuck to its view that the gas market in India has not matured enough for free pricing to commence and turned down, for the second time in less than six months, the petroleum ministry’s proposal for letting firms sell up to half the output from difficult and challenging fields at market rates. North Block has given many reasons for its stance: Absence of sufficient competition among gas producers, tepid demand, the impracticality of freeing input (gas) price when output prices (power and fertiliser) are not market-determined and have grave implications for the exchequer and, finally, its assumption that a higher price might not result in a surge in investments by gas producers at this juncture.

While approving a new formula based on select global prices for gas pricing in India in October last year, the Cabinet Committee on Economic Affairs (CCEA) held out a promise to investors in the hydrocarbon sector who were unhappy with the quantum of price increase the formula allowed (the price now is roughly the same as before the new formula) that sufficient incentives would be available for developing geologically difficult fields. The petroleum ministry later proposed that difficult areas be categorised into five groups and market-determined pricing for 20-50% of these fields’ output; the more difficult a field, the larger its share of sales in the open market. Difficult fields include high-temperature/high-pressure areas and deepwater and ultra-deepwater ones.

Earlier, the finance ministry had expressed doubts whether the pricing model prepared by the petroleum ministry was indeed in line with the CCEA decision; the latter explained it was very much so, and pitched for the special incentives with supporting data, including the additional output likely from the difficult fields if pricing is made more remunerative to the developers.

The finance ministry, however, is learnt to have sent back the proposal to the oil ministry, saying that the market needs to mature for such a proposal to be implemented.

In the absence of a mature gas market, explorers could jack up the price of gas if pricing freedom is allowed, North Block feels.

Though petroleum minister Dharmendra Pradhan has maintained that there is an ‘in-principle agreement’ on the issue between him and finance minister Arun Jaitley, with the latest development, the implementation of the proposal could get delayed inordinately. The premium model was expected to be in place by March 2015, and it was supposed to b restricted to post-November 2014 discoveries. ONGC, Reliance Industries, Cairn India, BP, Oil India and Gujarat State Petroleum Corporation were expected to benefit from the move.

The petroleum ministry’s proposal was based on the recommendation of Directorate General of Hydrocarbons (DGH), the technical arm of the ministry. As per the plan, the explorers could determine the market price for the specified volumes by calling bids from buyers. It would show the rates the market is willing to pay.

According to consultancy firm McKinsey, India will be producing 47 million metric standard cubic metres per day (mmscmd) from “challenging fields” in the next two to five years. The country’s total gas output is around 90 mmscmd at present. Globally, countries such as the US, Russia, Malaysia, China, Canada and Colombia offer incentives for drilling of hydrocarbons from difficult reserves. The incentives include income tax breaks, investment allowance, lower production tax and pricing returns.

Reliance and BP, sources said, have urged the petroleum ministry to relax the CCEA decision of October 18 last year to allow the premium pricing methodology for discoveries made prior to November 2014 as well.

The Centre’s fertiliser subsidy, two-thirds of which accounted for urea, is budgeted to increase to about Rs 73,000 crore in FY16 from Rs 71,000 crore in FY15.


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