Administered pricing regime for PSU gas being phased out

Armed with the Supreme Court’s affirmation of the government’s powers to control pricing and allocation of natural resources, the petroleum ministry is planning to do away with the system of administered pricing for the gas produced by state-owned ONGC and OIL. The idea is to move towards a single pricing regime, based on the arm’s-length principle, for both PSU producers and their private sector rivals. Since the government anyway approves the price, the APM regime would be redundant in due course, it is reckoned.

Currently, ONGC and OIL sell APM gas at $1.7 per million British thermal units, which is one of the lowest price for gas sold in the country, and a loss-making venture for the two PSUs. APM price is 68% cheaper than the gas from Panna Mukta Tapti field and 57% cheaper than RIL’s KG D-6 gas.

The government’s new thinking is that rather than the periodic—and often delayed—revision of APM gas price to factor in inflation and other variables, the APM system itself could be done away with. To start with, the PSUs would be allowed to sell gas from the new fields in their nominated blocks at a non-APM price approved by the government, official sources said.

The APM system would subsequently be phased out for gas from the old fields as well. There are many hurdles that come in the way of dismantling APM altogether at this juncture, because a clutch of customers are covered under court orders and the policy of low-cost gas supply to small and medium enterprises.

When contacted, ONGC CMD RS Sharma welcomed the move. “This is a much-awaited decision. We welcome it. This would bring much-needed relief to ONGC in terms of equity and parity in the pricing regime,” Sharma said. He added that a decision to raise APM price was taken by the Union Cabinet in 2005, but because of various uncertainties, it could not be implemented. Now, those uncertainties have ebbed and this is the time to usher in a change in pricing policy, he said.

A senior government official told FE that unless ONGC and OIL are allowed to sell at a viable rate, they will not be able to invest more in gas production or even sustain existing production. “Principles of pricing have to be the same for the nominated fields and other fields,” the official said. Nominated fields are those given to state-run companies before the government brought the auction-based production sharing contract regime.

When implemented, the move would allow the state-owned entities to sell gas at the same benchmark price that the government sets for the private sector. The plan to scrap administered pricing would give significant relief to ONGC and OIL, as it goes beyond the earlier plan of raising the administered price in three stages to the level of $4.2 for million British thermal units, at which RIL sells gas from its prolific KG D-6 field. Minister of state for petroleum Jitin Prasada told the Lok Sabha on April 29 that ONGC has reported an under-recovery (revenue loss) of Rs 4,745 crore in 2008-09 on its gas business, leading to lack of investment for exploration and production activities. ONGC has 297 nominated oil and gas blocks. ONGC is operating mainly in the Western offshore fields, while OIL is operating in Assam and Rajasthan.

APM price for gas was last revised in 2005 at Rs 3,200 per thousand standard cubic metres (mscm). For small-scale consumers and the CNG sector, it was raised in May 2005 to Rs 3,840 per mscm, said a recent report prepared by state-run gas distributor Gail. The government was planning to raise this to $ 4.2 mmBtu in stages, but the latest thinking is that there should be a single pricing regime for both PSU and private producers in the future...

Source: Financial Express

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