On 19th December,
2013 the Govt. of India ratified the decision, announced earlier on 27th June, 2013 to increase the price of natural gas for
domestic producers from $4.2 / MMBTU to $8.4 / MMBTU effective April, 2014.
The rationale behind such a decision is beyond understanding. The 100% increase in
price of natural gas will certainly negatively impact the Power and Fertilizer
sector as well as the general public but would give windfall benefits to Reliance.
In fact, even the earlier increase in price of gas from $2.34/MMBTU to $4.2/
MMBTU in October, 2007 by the Empowered Group of Ministers headed by the then External
Affiars Minister Mr.Pranab Mukherjee is
equally puzzling and not justified.
Pricing Methodologies for Natural Gas:
There are different methodologies to price NG. The most acceptable
and prevalent are listed below:
· Gas-on Gas competition (GOG):
By interplay of demand and supply-Gas on Gas completion.
· By regulation
(a)
Determined or approved by a
regulatory authority or Ministry at a level to cover the “cost of service”
including the recovery of investment and some reasonable rate of return (RCS).
(b)
The price set below the cost of production to give state subsidy
to the people of the country (RBC).
© The price is set on an irregular basis on political/social
considerations to raise revenue or cost of production (RSP).
· Oil Price Escalation: The price is linked, usually to a base price
and then an escalation clause to competing fuel (OPE).
According to a 2010 survey conducted by the sub-group of The Strategy,
Economics and Regulation Committee (PGCB) of International Gas Union(IGU) and
presented in the World Gas Conference in Kuala Lumpur in June,2012,most
preferred method to sell (contract) Natural Gas in indigenously producing countries like India
is through Gas on Gas competition(42%)
and the next best method is through Regulatory Authority to cover” cost of service”,
including recovery of investment and some reasonable rate of return (18%)
In
India, Natural Gas is produced indigenously. Therefore, pricing of NG should be based on Gas to Gas (GOG) competition, if
feasible, which is followed for 42% production, worldwide.
Gas on Gas
Competition (GOG):
This methodology was used in 2004, when NTPC invited international
bids for supply of Natural Gas and RIL bid was accepted. It is well documented,
though the agreement never saw the light of the day. The fact is:
Reliance gave a bid for
supply of 12 MMSCMD Natural Gas ex KGD6 @$2.34/MMBTU for 17 years, commencing
in 2007.
The NG price discovered in this case was at Arm’s length sales in
the region as required under Production Sharing Contract(PSC) .There is and was no
reason to ignore this price. In all fairness, it should be applicable until
2024 (17 years period from 2007). However, the Government of India under UPA
rejected it on the pretext that the price discovery is not at Arm’s length.
We do not see any justification in
Government’s stand in not treating this price at Arm’s length.
Fixation of NG price at
$4.2 MMBTU in October, 2007
The Government of India rejected the price discovered through RIL
bid as mentioned above on the pretext that the price is not at Arm’s length
sales. Reliance was asked to discover Arm’s length price by seeking bids from
the market. In May, 2007, RIL asked price bids from 10 Indian companies-5 from the
power and 5 from the fertilizer sector.
The bidders were asked to quote:
In a unique formula given by Reliance:
NG price in INR /MMBTU= 112.5+C+ ER (OP-25)^0.15
Where C was to be positive integer and the only component to be
quoted by bidders.
ER is exchange rate for the previous year
OP is Brent crude oil price with a cap of $65/bbl
Comments:
(a) It is very much doubtful
if this formula is used anywhere else in the world.
(b)
The pricing was linked to Brent crude oil. The basis of linking
the price to Brent crude is beyond our comprehension. Brent crude oil is not a
competing fuel for power generation or fertilizer production. . For power generation coal is used for nearly
60% power generation in India and not Oil.
(c)
Why base price was pegged to $2.5/MMBTU (Rs.112.5 at conversion
rate at that time)? Is it based on NTPC bid of $2.34/MMBTU or arbitrarily?
(d)
Criteria for selecting these 10 companies are not known.
The price proposal was accepted by Empowered Group of Ministers in
spite of opposition by the Cabinet Secretary, Govt. of India and Principal Advisor
(Energy), Planning Commission.
Why price of $4.2/MMTU is
not at Arm’s length and should not have been accepted?(1) The formula given by RIL
meant that there cannot be any offer below $4.64/MMBTU at prevailing Brent Crude
oil price>$65/bbl as the condition of the bid was to quote C as positive
integer. Even if someone quotes the lowest number “1”, price according to the
formula would be $4.64/MMBTU.
(2) What is the basis of
pre-fixing the price at $4.64/MMBTU?
(3) When RIL asked bid from selected
10 companies based on a unique formula in May, 2007, RIL had already committed
almost 40MMSCMD gas(12 MMSCMD to NTPC and 28MMSCMD to RNRL. Both the cases were
sub- judice. Under such circumstances, the market perceived that 40MMSCMD gas
is already allocated and bids are being sought for the balance available quantities.
Thus, the bidders were made to perceive
the market very tight.
(4)
A large number of Power and Fertilizer projects were approved/constructed
on the basis of envisaged gas availability from KGD6,leading to increased
demand and thus, tightening of the market.
Revision in NG price from
$4.2/MMBTU to $8.4/MMBTU effective April,2014
.
In May, 2012 Government of India appointed a committee under the Chairmanship of Dr. C
Rangarajan, Chairman, and Economic Advisory Council to the Prime Minister to
recommend the price as price fixed in October, 2007 at $4.2/MMBTU was valid
until March 2014.
The Rangarajan Committee
submitted its report to the GoI in December 2012,
Recommending the pricing formula on the basis of
the average of the prices of imported
LNG into India and the weighted
Average of gas prices in North
America, Europe and Japan, as follows:
PAV = {PIAV + PWAV} / 2
PAV = Sales price for domestic natural
gas sales in India
PIAV = Netback price of Indian LNG
term imports (excluding spot imports)
PWAV = Weighted average of prevailing
gas prices in global markets, based on:
(a)Henry Hub gas price in U.S. and
total volumes consumed in North America
(b)National Balancing Point gas price
in U.K. and total volume consumed in Europe and Eurasia
©
Netback
price of Japanese LNG imports and total volume imported by Japan
The pricing formula will be effective
on April 1, 2014 for a period of five years, with the price to be revised quarterly
using the approved formula. The price for each quarter will be calculated based
on the 12 month trailing average price with a lag of one quarter (i.e., the
price for April to June 2014 will be calculated based on the averages for the
12 months ended December 31, 2013).
Using the approved price formula, the
price effective for April 1, 2014 is estimated at around $8.40/MMBTU, double the
price of $4.20/MMbtu for current gas sales from the D6 Block.
The pricing terms of
the Petronet contracts are expected to result in further increases in the gas
prices in future quarters, assuming current pricing levels of JCC,U.S. Henry
Hub, U.K. National Balancing Point and Japan LNG imports.
Comments:
The question arises “How was
this price arrived at?”
(1)
Is it based at arm’s length sales in the region as stipulated in
PSC?
(2)
What is the relationship of imported LNG price with indigenously
produced NG?
(3)
What is the relationship of Henry hub, NBP and JCC prices with the
NG produced in India?(4)
Why” unique formula” adopted in 2007became redundant and not considered valid by the same experts and the
UPA Government ,who preferred the formula over the Arm’s length price detected
through NTPC through International competitive bidding.
(5)
Is it true that the” Unique
formula” of 2007 was dumped as it was giving NG price of $4.45/MMBTU, even after considering current
price of Brent of Us$110/bbl without any
cap as against RIL wish for a price of $14.2/MMBTU
It appears to be a typical
case where price of NG from KGD6 was first decided and then a committee was set
up to justify the price by using some data irrespective of any rationale.
Gas Price fixation by the
UPA Government of India is another Scam
in the making to benefit Reliance at the cost of Aam Aadmi . Let us not forget that only PSC is binding and everything else is blinding.
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