Stoutly defending the move to raise price from current $4.2 per million British thermal unit, Chidambaram said investment in domestic oil and gas hunt had dramatically fallen in absence of remunerative prices, resulting in sharp dip in production that was being made up through costlier imports.
After deliberating on the proposal for over one-and-half hours, the Cabinet Committee on Economic Affairs (CCEA) last evening approved pricing of all domestically produced natural gas at an average of the cost of imported liquid gas (LNG) on long-term contract and international gas benchmarks.
The pricing according to the formula, which was suggested by a panel headed by Prime Minister's economic advisor C Rangarajan, will be applicable to all domestic gas from April 1, 2014. Gas rates will change every quarter based on average imported cost and international hub rates and this formula would be valid for five years.
The increase in gas price was opposed by user ministries of power and fertiliser as it would lead to cost of generating electricity spiking to Rs 6.40 per unit from Rs 2.93 and nearly Rs 9,000 crore per annum rise in cost of urea output.
"At the moment we are fixing only output prices (rates payable to gas producers). This will indeed have impact on the consumer, but those prices are not being fixed today," the Finance Minister said adding that the price power and fertiliser companies will pay for gas are not being fixed now.
"What is the price at which it should be supplied to a power plant, to a fertiliser plant in order to make power affordable, fertiliser affordable... that can still be decided between now and April 1," he said.
Stating that the government was conscious of keeping power and fertiliser prices low, he said, "It could be tweaking prices or it could be bearing additional subsidy. There are various methods but at the moment we are not addressing those issues."
Rejecting suggestions that the gas price hike decision was made to benefit private sector, Chidambaram said, all PSU oil company chiefs had on television welcomed the move.
"We are not being influenced by anyone. If at all we are being influenced, we are influenced by the realty of the economy. Economic realty is that we have to produce more gas," he said. "We have to produce more gas and only way it can be done is to bolster investment."
Refusing to commit if the government will subsidise gas to power and fertiliser sector, he said, "The power and fertiliser ministries have raised the issue. We can look at fixing the input costs for these sectors. The issues will be addressed in course of time."
Oil Minister M Veerappa Moily said most of the benefit from gas price increase will flow to public sector firms like ONGC who account for two-third of the current domestic output. The new price will apply uniformly to all companies - public sector and private sector, and all forms of gas - conventional natural gas, coal-bed methane and shale gas.
Oil Secretary Vivek Rae said while the burden of the gas price increase on power and fertiliser sector to about $1 billion annually, $500 million will accrue to the government by way of royalty, taxes and profit on higher rate.
The rate increase was also necessary because the upstream regulator DGH had branded several of discoveries made in deep sea as economically unviable to develop at $4.2 price, he said.
At least two-dozen gas discoveries, holding reserves in excess of 4 trillion cubic feet, made by Reliance Industries will become viable at the new price. A similar number of finds of Oil and Natural Gas Corp (ONGC) too would become economical to produce at the new rates.
The option before the nation was to either keep the finds in the ground and continue importing gas at $12-13 or pay much less price to domestic producers to help raise output and reduce foreign exchange outgo, he said.
The Rangarajan panel had suggested using long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India.
The CCEA, however, modified this by excluding spot imports and now only price of long-term contracts would also be considered, Moily said. While the Rangarajan panel had recommended revising domestic gas prices every month, the Oil Ministry changed it to a quarterly revision.
While the average as per Rangarajan suggested formula currently comes to $6.775, excluding spot purchases will bring down the price to about $6.4. Similarly, the indicative price in April using Rangarajan formula came to around $8.42, the new formula would bring this down to just about $8.
While RIL's KG-D6 gas price was fixed in 2007 at $4.205 per mmBtu for first five years of production, APM gas rates were last revised in June 2010 when prices were raised to $4.2 from $1.79. RIL began production from its eastern offshore KG-D6 field in April 2009.
Chidambaram said no investment was coming in and capital was actually going out of India. While investment in India has declined from $6.3 billion in 2008-09 to $1.8 billion in 2012-13, Indian promoters are investing abroad with $27 billion flowout in last 10 years and other $10 billion in pipeline, he said.
"The only way to correct this is to give investor the reasonable price which will attract him to make investment here so that we can increase our domestic production," he said.
Chidambaram said gas production in India had declined from 143.1 million standard cubic meters per day in 2010-11 to 111.44 mmscmd in 2012-13 while liquefied natural gas (LNG) imports had risen to 30 per cent of total consumption.
At current rate of production, LNG imports, that cost three times the current domestic rate of $4.2, are expected to jump to 234 mmscmd by 2016-17 from current 50 mmscmd.
"For every unit of gas that we do not produce in India it doesn’t mean we are consuming one unit less. They are importing that one unit. So for every unit of gas that is not produced, there is no saving of money. There is actually a huge price to be paid, we have to buy the gas at $11, 12 13," he said.
"We simply do not have the money to import such a huge quantity," he said. "The case for increasing domestic production is a compelling case and no one can say that India can meet its gas requirement by imports."
Chidambaram said by the time new pricing comes into effect in April next year, investments will start flowing in. The gas price hike would "increase the power and fertiliser cost considerably and therefore burden on the consumers," he said. "We will have regard to that and then decide how to help those sectors. "
"The consequence of input price especially on power and fertiliser sector will be addressed," he said. Asked if the government may ever think of putting a cap on prices in case of excessive volatility, he said, "We can always reconsider (the formula)" if the gas price becomes unaffordable.
"At the moment, the formula has been approved for a period of five years. We can always tweak the formula," he said. "At the moment, we should confine ourselves to this formula. This formula must bring some stability to investors. For five years, this will be the price, come and invest here.
This is the price for five years, please come and invest. The idea is to promote investment. Without investment, there will be no gas," he said. The Oil Ministry reasoned that the increase in gas price was needed to incentivise exploration while also resulting in higher revenues to the government. Every dollar increase in gas price would result in $128.5 million (Rs 707 crore) in additional royalty and profit petroleum.
However, Power Ministry had opposed any hike saying electricity generation at any price of over $5 was economically unviable. Also, it had questioned the need to price the fuel in US dollars as any depreciation in the Indian currency would further add to the strain on the consumers.
The variable cost of generating electricity would be around Rs 5.40 per kilowatt hour (per unit) at new gas price, taking the total cost of generation to Rs 6.40 per unit. This compares to current cost of Rs 2.93 a unit.
The outgo for every $1 increase in gas price will be up to $1.138 billion (Rs 6,260 crore). Outgo for fertilizer sector due to $1 increase in gas price will be $406 million (Rs 2,233 crore).