Not clear what needs to be tweaked in the formula
Given that a section of the government is not too comfortable with the higher gas prices formula recommended by C Rangarajan, former chairman of the Prime Minister’s Economic Advisory Council, it is likely the gas price hike may be delayed. Indeed, petroleum minister Dharmendra Pradhan has indicated as much when he said said ‘a right decision will be taken at the right time’. While the government has not specified what it finds objectionable in the formula, a Parliamentary Standing Committee report—that many BJP leaders swear by—indicates what some of these may be. One, why is the price in dollars, and not rupees? Why have European prices been taken into account instead of Russian ones? Why are we looking at global prices without taking into account the local costs of production? Why have Japanese prices of gas been taken into account in the Rangarajan formula when everyone knows Japanese imports are among the most expensive in the world?
The dollar-pricing argument is the easiest to deal with—the companies are importing rigs in dollars, so they need to be paid dollar prices; in any case, oil producers are paid in dollars, so it is unreasonable to single out those producing gas. As for Russian prices versus European ones, it is worth keeping in mind the very recent Russian deal with China to supply 30 billion cubic metres of gas over three decades at a cost of $400 billion or so. That works out to around $11-13 per mmBtu which, by the way, is roughly the price at which India imports 25% of its gas demand even today—the share is expected to go up to 42% as early as FY17. Including the Japanese price in the formula looks a lot more problematic, but it is not really so when you examine the formula in detail. In a nutshell, the formula takes the average price of Indian gas imports and the average price of global exports, adds them up and divides by two to get an average price which is to be paid to Indian producers like ONGC, RIL, Cairn and GSPC. All prices are on what is called a ‘netback’ basis, that is, the price does not include the costs of transportation or liquefaction or re-gasification. Typically, gas produced in Qatar will have to be transported by pipeline to a port where it is liquefied in order to be shipped to Japan; and on its arrival in Japan, it has to be re-gasified—all of this can add $7-8 per mmBtu to the price and that is why Japanese prices are so high. Once you remove this, as Rangarajan recommends, the inclusion of the Japanese imports adds just 30-40 cents in the current Rangarajan-based price or around $8.5 per mmBtu. The government is welcome to try and rework the price, but it is not clear how the formula can be tweaked; more important, if the formula is tweaked and lowered, it is not certain that oil/gas firms including the state-owned ONGC will want to explore for gas in the deep waters where, sadly, most of India’s gas reserves are.