Par panel calls for review of Rangarajan gas price formula

A Parliamentary panel has sought a review of the Rangarajan formula that will be used to price natural gas from April next year saying the rate should be fixed after factoring in domestic cost of production.

The Standing Committee on Petroleum and Natural Gas in a report tabled in Parliament said the proposed formula is a simple average of two methodologies -- price of imports of LNG into India by different suppliers, and weighted average of prices of natural gas prevailing at Henry Hub in USA, National Balancing Point in London and netback import price at the well head of suppliers into Japan.

"It is to be observed that the benefit of lower gas price at Henry Hub has been largely diluted by the inclusion of Japan's liquefied natural gas prices which includes 60 per cent royalty component linkage to JCC (Japanese Crude Cocktail) and host of other factors," it said.

The panel, headed by Andhra Pradesh MP Aruna Kumar Vundavalli, felt Russia which exports 40 to 50 per cent of its gas to Europe at a price of about $8.77 per million British thermal unit, could be a better indicator of gas price.

Russia is the world's second largest gas producer and consuming country in the world and its prices could be incorporated as one of the reference price in the pricing

formula, it said.

The committee also pointed at omission of domestic cost of production of natural gas which ranges from $2.48 to $ 3.63 for private and public sector firms, in the formula.

"The Rangarajan Committee formula for arriving at natural gas price should be throughly reviewed and reconsidered.

“The committee have recommended factoring domestic cost of production of gas for arriving at the price, and fixation of price of gas in rupee terms," the report said.

The Rangarjan pricing formula will be effective April 1, 2014, for a period of five years, with the price being revised quarterly.

Prices for each quarter will be calculated based on the 12-month trailing average price with a lag of one quarter (i.e. price for April to June 2014 will be calculated based on the average for 12 months ended December 31, 2013).

Using the approved formula, gas price in April-June is estimated at $8.2-8.4, nearly double the current selling price of $4.20 per mmBtu.

The panel said a note prepared by Ministry of Finance argues that there is no logic in inclusion of the consumption by Japan which is having very high import LNG price and that nowhere in the world, well head prices of natural gas has been linked to spot LNG contract basis.

"The committee found merit in this view of the Ministry of Finance," the report added.