Natural Gas Pricing Formula Plus Diesel Deregulation: NDA Government's New Moves

Natural Gas Pricing Formula Plus Diesel Deregulation: NDA Government's New Moves
The NDA government has given the approval for raising the natural gas price to USD 5.61 per million British thermal units or mmBtu from November 1st. Reliance Industries/ RIL will continue to go on at the current USD 4.2 till shortfall for the output will be recovered from the KG-D6 block.

The Rangarajan formula has been modified by the Cabinet to initiate a decrease in natural gas rates from USD 8.4 to USD 5.61 according to the Union Finance Minister. The new formula will work with effect from November 1st, but the rates will undergo revision every six months. The next revision is scheduled for April 1.

For the flagging D1 and D3 oil fields in KG-D6 block where output should have been 80 million standard cubic feet per day but it is less than 8 now, RIL has been given the option of continuation of current rates. The revised increased price will have to be paid by consumers only and the difference between RIL and consumer prices will be deposited in the escrow account. In case it can legally prove it has not purposely cut production, and output fell as a result of geological reasons, RIL may get the higher rates.

Higher gas prices will lead to an increase at the cost of running power stations and fertiliser plants, leading to rise in infrastructure cost and food cost and an increase in the rate of information. Dollar rise in gas price leads to INR 1370 tonne rise in urea production cost and a 45 paise per unit rise in electricity tariff for the 7% of power generation capacity in India which is based on natural gas.

There will also be a minimum INR 2.81 rise per kg in price of CNG or compressed natural gas and INR I.89 per standard cubic metre rise in piped cooking gas. ONGC and RIL had suffered immensely as the result of delay in the announcement of gas prices especially for the former as far as stock valuation was concerned.

The NDA government also had plans to sell the 5% stake on ONGC for narrowing the budget deficit. While the decontrol of diesel will lead to 6% immediate reduction in auto fuel prices and also lead to significant subsidy savings, investors in the hydrocarbon sector were less than satisfied. Just a 36% increase for domestically priced gas was not a piece of good news for them.

A greater hike may have led to accelerating of exploration of this pollution free gas, but this was not to be. The hydrocarbon sector must grow as ecological considerations are equally important. However, economic considerations may also play a role as too high a price hike can deter consumers from opting for natural gas. Caught in the dilemma, the government seems to have sought to strike the right balance.