ONGC & OIL gas prices to be capped at USD 6.5 per mmBtu for 5 yrs

A panel led by Kirit Parikh is recommending a floor & ceiling price for natural gas produced from legacy fields of ONGC, OIL for 5 years to moderate CNG and PNG prices
ONGC & OIL gas prices to be capped at USD 6.5 per mmBtu for 5 yrs
ONGC & OIL gas prices to be capped at USD 6.5 per mmBtu for 5 yrs

New Delhi: A government-appointed gas price review panel, led by Kirit Parikh, is recommending a floor and ceiling price for natural gas produced from legacy fields of state-owned firms for five years to help moderate CNG and piped cooking gas rates. State producers Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) will be paid a minimum or floor price of USD 4 per million British thermal unit and a cap or ceiling price of USD 6.5 per mmBtu as against the current rate of USD 8.57 per mmBtu, three sources said. "The report, which calls for not tinkering with the existing pricing formula for difficult fields such as KG-D6 of Reliance Industries and BP plc, is under finalisation and may lower the ceiling price for ONGC gas marginally. The floor and ceiling price will be applicable for five years although the initial thought was to keep it for three years, they said, adding the ceiling price will have an annual escalation clause," said the sources.

Panel suggests two different pricing regimes

"The escalation being suggested is USD 0.5 per mmBtu annually with no change pricing for the first two years or a USD 0.25 per mmBtu annual escalation for five years. The escalation will be adjusted to the foreign exchange rate," said the sources. "The panel, which was tasked with suggesting a fair price to the end-consumer while ensuring a market-oriented, transparent and reliable pricing regime for India's long-term vision for ensuring a gas-based economy, has favoured two different pricing regimes," said the sources.

Committee recommends minimum base price for old fields of ONGC & OIL

For the legacy or old fields of ONGC and OIL where the cost has long been recovered and which are currently governed by a formula that uses rates in gas-surplus nations such as the US, Canada and Russia, the committee is recommending a floor or minimum base price and cap or ceiling rates. This would ensure that prices do not fall below the cost of production, as they did last year, or do not spike to record levels as currently.

Gas from legacy fields is sold to city gas distributors who had to raise rates of CNG and piped cooking gas by over 70 percent after prices went up from USD 2.90 per million British thermal unit till March to USD 6.10 in April and further to USD 8.57 last month, reflecting a surge in global rates. This rise in rates, which narrowed the gap between CNG and polluting diesel, had prompted the review.

Sources said the city gas will get top priority in the allocation of the gas from legacy fields, called APM gas. The sector will be in the 'no-cut' category, meaning supplies to other consumers will be cut first in case of a decline in production.

Market-driven pricing would also encourage new investments and attract global players

For the gas from difficult fields such as those lying in deep-sea or which are in high-pressure, high-temperature zones, the committee is suggesting not tinkering with the existing mechanism of paying them higher rates based on a different formula to compensate for the greater risk and cost involved, sources said. "This would ensure that explorers, who are seeing a surge in the cost of services due to the spike in global energy rates, are not put at a disadvantage," they added. This way the concerns over investments in exploration and production (E&P) being hit would also be addressed, they said, adding that market-driven pricing would also encourage new investments and attract global players.

'Price of gas from old fields was more than doubled to USD 6.1 per mmBtu'

The price of gas from old fields, which are predominantly of state-owned producers like ONGC and Oil India Limited, was more than doubled to USD 6.1 per mmBtu from April 1, and to USD 8.57 per mmBtu from October 1. Similarly, the rates paid for gas from difficult fields such as deep-sea KG-D6 went up to USD 9.92 per mmBtu from April 1 against USD 6.13 per mmBtu. They rose to USD 12.46 per mmBtu last month.

KG-D6 fields of Reliance Industries Limited and its partner BP of the UK are governed by the pricing formula for difficult fields. The rate for difficult fields from October 1 is USD 12.46 per mmBtu.

The panel, headed by former planning commission member Kirit S Parikh, is in the final stages of finalising its report. It would be submitted to the government at any time, they said. The oil ministry will process the recommendations before moving them to the Cabinet for approval for changes in the existing gas pricing regime.

Sources said the panel recommendations will aid in meeting the government's target of more than doubling the share of natural gas in the primary energy basket to 15 percent by 2030 from the current 6.7 percent.

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