The cabinet committee for economic affairs (CCEA) has approved the Rangarajan Committee’s proposal to raise the price of natural gas from April 1, 2014. The price of gas is expected to be raised to around $8.4/MMBTU and then revised every quarter thereafter as per the Rangarajan formula. The price of gas is determined by averaging the netback wellhead prices of Indian imports and the gas prices prevailing at global trading hubs of US, UK and Japan.
While upstream oil and gas companies have been demanding a gas price increase for a few years now, the fertilizer and power sectors have voiced serious concerns over any increase in gas price. The upstream companies felt that a low price of gas did not adequately compensate them for the substantial risks involved in exploration activities. Further, the E&P companies argued that offshore exploration and production is significantly costlier than onshore exploration and the low price of gas makes deepwater and ultra-deep water exploration and production unviable. On the other hand, the power and fertilizer sectors are extremely price sensitive and any increase in the price of gas has a big impact on their profit margins. Both these sectors have zero pricing power as the prices of fertilizers and energy are heavily regulated by the government.
The production of gas from RIL’s KG-D6 block was expected to transform the gas market in India. The gas consumers embarked on an expansion spree encouraged by the prospects of cheap and abundant gas. Although the gas field showed great promise in the initial years of production, production has been on the decline over the last two years and production has decreased to just 14 MMSCMD compared to estimated production of 80 MMS CMD. The gas utilization policy of the government that assigns priority to various sectors for allocation of domestically produced gas resulted in a skewed distribution of gas supply when domestic production declined, benefiting the fertilizer sector at the expense of the power sector. While the supply of gas to the fertilizer sector was not affected due to the decline in domestic production, owing to higher priority, the supply to the power sector reduced substantially leading to an overall drop in gas power plants PLFs across the country. As a result, the power industry in India is facing an extremely tough business environment. The sourcing of fuel, both coal and gas, has become extremely difficult. The power companies are burdened by excessive debts and banks have become weary of lending to the sector.
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