Policy Update

Uniform price regime for gas

The Government is studying the feasibility of a uniform price regime for gas. It is learnt that GAIL (India) Ltd has been asked to conduct the study.
The public sector gas transmission and marketing company has already been given the terms of reference.
“A study to consider the feasibility of having a uniform cost price regime is being undertaken,” the Minister for Petroleum and Natural Gas, Mr Murli Deora, said on Thursday in a statement in the Rajya Sabha to a calling-attention motion on ‘the availability of natural gas for power generation and other national priorities at affordable price throughout the country’.
The report is expected to be made available within three months, he said.
Currently, there are three gas pricing regimes – gas sold at administered price; under production sharing contracts (PSC), such as those from joint venture fields; and under the New Exploration Licensing Policy (NELP).
To have such a regime for the gas sector will not be easy, sources told Business Line.
“There are lot of legal and technical issues which need to be addressed. Such issues as the pricing regime should not violate the contract; whose network should be utilised for the purpose; and who will be nominated to buy the gas,” they added.
The administered price for the gas produced from government-nominated fields has been set at about $2/mBtu, except in the North-East, where it is $1 to $1.2/mBtu.
The price of gas from pre-NELP fields was approved in accordance with the PSC and range from $3.5 to $5.73/mBtu.
The price of gas from imported re-gassified liquefied natural gas (R-LNG) in respect of term contracts is over $5/mBtu. The spot price of LNG varies from time to time.
Under the NELP PSC, it was the requirement that a price formula based on an arm’s length basis be approved before the sale of gas.
The formula submitted by contractor of Krishna-Godavari Basin D6 block was considered by an empowered group of ministers (EGoM). The formula is linked to crude price and is based on arms length principles.
The gas from Reliance Industries Ltd (RIL) operated D6 block is $4.2/mbtu (landfall point) at a crude price of $60 a barrel or above. If crude falls to $25 a barrel, the D6 gas will cost $2.5/mBtu. The price formula is fixed for five years.
In his statement, the Minister said that the price of gas from D6 block being made available to the priority sectors is substantially lower than the prevailing prices of alternative liquid fuels like naphtha.

From April 1, 2009 production from KG D6 block has started. At present, 35 mscmd gas is being produced. “The intention of the Government is to operationalise all gas based assets which are lying idle/untilised due to non-availability of gas,” he said.

Govt set to curb pricing freedom of Nelp-VIII cos

The government plans to set stiff new terms for the pricing and marketing of oil and gas from exploration blocks that are due for auction, triggering concerns that it may frighten away potential bidders and mark a return to ‘licence and control raj.’

The new rules will give the government equal right along with the winning bidders to set the price at which gas will be sold, a petroleum ministry official crafting them said on condition of anonymity. The government will also decide who gets to buy the gas and how much.

Existing production sharing contracts allow the operators of oil and gas fields the freedom to set the price which has to be approved by the government. They are also allowed freedom to market the output.

The new rules are being planned in the backdrop of a blazing row involving the feuding Ambani brothers and the government over the sharing and pricing of gas from the Krishna-Godavari basin.

Although the PSC with Dhirubhai Ambani-run Reliance Industries for the KG gas gave the company pricing freedom, the government intervened saying provisions of the contract were not being fully followed. A panel of minister set the price at which the gas can be sold and also decided which sectors should get it first.

The D-6 block in the KG basin was awarded to RIL as part of the first round of bidding under India’s New Exploration and Licensing Policy (NELP). The eighth bidding round will commence on Saturday with the first road show in Mumbai.

“The price set and the supplies will have to be reviewed from time to time keeping in mind the demand- supply condition and volatility in the prices,” the official said, adding that the restrictive rules will be in place until the country has enough gas to meet needs for infrastructure.

There will be a single price for commercial sales and calculating the government’s profit petroleum, a share of the earnings that the exploration company gives to the government from its sales revenue.


The official argued that the government’s move to play a bigger role which will limit the freedom of oil companies is to ensure fair pricing and proper use of a scarce national resource. But a top executive of a leading private oil company that has acquired exploration blocks in previous NELP rounds was scathing in his criticism.

“This is like going back to a controlled pricing regime. Call it APM (administered pricing mechanism) gas. Its a retrograde step going back to licence and control raj.”

Most oil companies, both domestic ones such as ONGC and Cairn as well as overseas multinationals like British Petroleum and British Gas, are sceptical about how well NELP-VIII will fare with regard to attracting investments, particularly in the background of the public spat of KG gas.

“The NELP-VIII round is doomed. Most oil companies would not want to touch India’s exploration and production sector with a barge-pole at this point,” observed a member of the board of one of India’s leading oil companies.

Ernst & Young’s Ajay Arora, partner for transactions advisory services and the head of the oil and gas practice, remarked that government’s move would be a "knee-jerk reaction."

"Gas, like crude, should be allowed to find a price based on international benchmark prices. Gas contracts have been struck in many oilfields in India where the buyer and seller find a mutually acceptable price to sell the gas," he said.

Director general of hydrocarbons V K Sibal said "we would like to ensure transparency and keep the norms investor-friendly" but declined to comment on the new rules. The oil ministry has asked the upstream regulator -- the Directorate General of Hydrocarbon (DGH) run by Mr Sibal -- to initiate the process to remove "ambiguity" from the existing model production sharing contract (PSC).

The model PSC has undergone several changes since NELP-I when it was launched. The intention is to simplify its language and have specific provisions," another official in the oil ministry said.

R S Sharma, chairman of ONGC, the largest oil exploration company in India, was of the view that the country’s hydrocarbons basins remain largely unexplored and "every effort should be made to ensure higher investments."