Govt plans to 'subsidise' imported LNG

The government may subsidise costly imported gas by making users of cheaper domestic gas pay more under its unique plan to rationalise gas prices, a source in knowledge of the development said.

Currently, gas imported in liquefied form  costs $5.7 per million British thermal unit as against $1.82 rate for fuel produced from state-owned ONGC'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 on long-term contract is slated to increase to $9.01 per mmBtu by 2012 and unless 'subsidised' it would have resulted in rise in electricity generation cost and spike in fertiliser subsidy.

The new contract that Petronet has entered into are at least 25 per cent higher than the 2012 price and the Oil Ministry has asked the state-run gas utility GAIL to study making LNG affordable, the source said.

GAIL hired Spain's Mercados Energy Markets India Pvt Ltd to suggest '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 price of gas from five different sources only for power and fertiliser units - the mainstay consumers.

The consultant suggested a pooled price of $3.48 per mmbtu for power sector and $3.81 per mmBtu for fertiliser sector, the source said, adding the report was under review of the ministry.

Industry observers expressed surprise at the move saying if the Government was keen on sheilding vulnerable power and fertiliser sectors it should have cancelled the expensive LNG that these plants were buying and instead allocated KG-D6 gas. The LNG, they said, should have been allocated to other sectors like steel which surprisingly has been given huge allocation of cheap gas from eastern offshore KG-D6 fields.

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

 "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 fertiliser 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 averarging pooling of gas transportation tariff as had been demanded by several consumers who fealt plants near source were getting cheaper fuel than those further away. Mercados said pooling of transportation tariff would be "inefficient and distortionary."