Govt plans to 'subsidise' imported LNG

The government plans to subsidise costly imported gas by making users of cheaper domestic gas pay more under a new rationalisation policy, a source with knowledge of the development said.

Currently, gas imported in its liquefied form costs $5.7 per million British thermal units as against $1.82 per mmBtu for fuel produced from state-owned Oil and Natural Gas Corporation's fields and $4.2 per mmBtu for gas from Reliance Industries' KG-D6 field.

The ex-terminal price of liquefied natural gas imported by Petronet LNG at Dahej from Qatar under a long-term contract is slated to increase to $9.01 per mmBtu by 2012 and unless 'subsidised', it would resulted in a rise in electricity generation costs and a spike in the fertilizer subsidy.

The price of LNG under the new contract that Petronet has entered into is at least 25 per cent higher then the 2012 price and the oil ministry had asked state-run gas utility GAIL to carry out a study on making LNG affordable, he said.

GAIL had hired Spain's Mercados Energy Markets India Pvt Ltd to suggest a 'Common Pool Price Mechanism'.

And though Mercados did not find a single instance of a uniform gas price for consumers anywhere in North America, UK and western Europe, it recommended averaging the price of gas from five different sources for only power and fertiliser units - the mainstay consumers.

The consultant suggested a pooled price of $3.48 per mmBtu for the power sector and $3.81 per mmBtu for the fertiliser sector, he said, adding that the ministry was reviewing the report.

Industry observers expressed surprise at the move, saying if the government was keen on shielding the vulnerable power and fertilizer sectors, it should have cancelled the expensive LNG that these plants were buying and instead allocate KG-D6 gas.

The LNG, they said, should have been allocated to other sectors like steel, which has been allocated huge volumes of cheap gas from the eastern offshore KG-D6 fields.

RIL can produce 80 million cubic metres a day of gas from KG-D6, but is forced to restict output below 64 million cubic metres for want of government-named consumers, they said, pointing to allocation of just 9.35 mmscmd of LNG to fertiliser units and 5.13 mmscmd to power plants.

"Gas price pooling is desirable for all the sectors consuming gas in order to bring in price stability at the individual consumer level.

However, power and fertilisers being the most vulnerable sectors, it is imperative for (them) to have a stable gas price," the report by Mercados said.

It also gave GAIL the role of the pool operator. Interestingly, the consultant was against pooling gas transportation tariffs, as has been demanded by several consumers who felt plants near the source were getting cheaper fuel than those further away.

Mercados said pooling of transportation tariffs would be 'inefficient and distortionary.'