The government is contemplating to put a cap on the price of domestic gas. In this regard, ministry of petroleum and natural gas (MPNG) has drafted a note for consideration by cabinet committee on economic affairs (CCEA).This is a bad idea! In October 2014, based on the recommendations of committee of secretaries (CoS), NDA – government had introduced new pricing guidelines for domestic gas whereby its price would be determined based on ‘modified’ Rangarajan (R)-formula effective from November 1, 2014. The R-formula used average prices of global benchmark at Henry Hub (USA) and NBP (national balancing point), UK on one hand and producers net-back from supplies of liquefied natural gas (LNG) to India and Japan in preceding 6 months on...
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Category: Administered pricing regime (APR)
Gas pricing – Modi’s ‘modified’ R-formula
For quite some time, media has been agog with strident criticism about Modi government’s alleged inability to come up with big bang reforms. One area where it has been targeted the most for alleged delay pertains to pricing of gas. To put things in perspective, a few words on the background are in order. In 2007, based on recommendation of a group of ministers (GoM), then UPA government had approved a price of US$ 4.2 per million British thermal unit (mBtu) – on net calorific value (NCV) basis – for gas supplies from Reliance Industries Limited (RIL’s) KG-D6 fields [awarded in first NELP (new exploration and licensing policy) round 1999] chargeable for 5 years from commencement of production. This price was...
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A crude anti-reforms attitude
Unkind burden And illogical too jorgen mcleman / shutterstock.com The Gujarat government’s efforts to squeeze out more royalty from ONGC could impact production and exploration The Modi government is keen to take up administrative and judicial reforms in a big way, but the actions of the Gujarat government may become a stumbling block. A case in point is the Gujarat government’s decision to collect a royalty of 20 per cent on the discount given by the Oil and Natural Gas Corporation (ONGC) on sale of crude to downstream oil PSUs. It stands to reason that royalty or cess should be levied on the sale price (after discount), as has been established by precedent as well. However, the Gujarat government’s...
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ONGC resources eroded by un-warranted levy and subsidy sharing
At a time, when Modi dispensation at the centre has pledged to take up administrative and judicial reforms in a big way, it is confronted with a legacy where actions of none other than Gujarat government may be becoming a stumbling block. A case in point is latter’s decision to collect royalty of 20% on discount given by Oil and Natural Gas Corporation (ONGC) on sale of crude to downstream oil PSUs. The decision was upheld by Gujarat High Court (GHC) which on Nov 30, 2013 ordered ONGC to pay dues of around Rs 10,000 crore retrospectively from April, 2008. ONGC challenged GHC order in Supreme Court (SC). On February 13, 2014, SC stayed GHC’s order but directed ONGC to...
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One step forward, two steps back
If raising the cap on subsidised LPG cylinders was bad enough, withdrawing Aadhaar linked payouts was disastrous The UPA Government is prone to talking loud on economic reforms. Yet, it is reluctant to take hard decisions. The government committed two blunders recently: it backtracked on the LPG subsidy reduction and — what’s worse — withdrew the direct benefit transfer (DBT) scheme. By doing so, the government has let go an opportunity to prune massive leakages in food, fertiliser and LPG subsidies and bring about a much-needed fiscal correction. Let us first look LPG subsidies. Flip-flops all along Prior to 2002-03, sale of LPG (besides diesel and kerosene) was subsidised under an administered pricing regime. This was paid for by higher...
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A crude demand for royalty
SUMMARY The subsidy ONGC gets on crude sales to downstream oil PSUs is not a part of its sales realisation and, hence, Gujarat’s demand for high royalty is illogical While administrative and judicial bodies are expected to aid the process of economic reforms, they sometimes tend to obstruct the smooth conduct of business. A case in point is the decision of Gujarat government to collect a royalty of 20% on the discount given by Oil and Natural Gas corporation (ONGC)—an upstream central oil & gas PSU—on the sale of crude to downstream oil PSUs. The decision has been upheld by the Gujarat High Court, which has ordered ONGC to pay dues worth R5,000–6,000 crore retrospectively from 2008. ONGC is already...
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Pruning LPG subsidy – one step forward, two steps back
UPA (United Progressive Alliance) Government always talks loud on economic reforms. However, it moves at a niggardly pace when, it comes to taking hard policy decisions. Moreover, there is no guarantee that it would stick to those decisions. A classic example is LPG subsidy. For decades, sale of LPG (besides diesel and kerosene) was subsidized under an administered pricing regime (APR) for petroleum products. Funds for subsidy came by way of revenue generated from sale of products like naphtha, ATF (aviation turbine fuel), fuel oil, LSHS (low sulphur heavy stock) etc at higher price. Essentially, this involved cross-subsidization by consumers of high end products like naphtha and ATF through what was euphemistically described as Oil Pool Account (OPA). OPA was...
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Can’t do gas pricing in a vacuum
Barely a few months after the news of allowing RIL to increase the price by 3.5 times the current level on the supplies from its KG fields, the spectre of a steep hike has come to haunt users again. A committee under C Rangarajan, mandated to suggest the design of future contracts for exploration and production of oil and gas, has also recommended a basis/formula to price domestically produced gas. It has suggested price to be benchmarked to four series of international prices, viz Henry Hub (HH) in the US, National Balancing Point (NBC) in the UK, netback prices of sources of LNG supply for Japan, and netback price of Indian imports of LNG at well head of exporting countries....
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Crippling effects of oil subsidies
A lesser known aspect of the much talked about oil subsidies is the unprecedented ‘liquidity crunch’ that oil PSUs viz., IOC, HPCL and BPCL, face perennially. Subsidies are administered through these undertakings. Under instructions from the Government, these PSUs sell kerosene, LPG and diesel at low prices (prior to June 2010, price of petrol was also regulated). How is the excess of cost over selling price covered? Oil and gas PSUs contribute 40 per cent of differential amount by way of discount on crude supplies. The Government is supposed to reimburse 60 per cent as subsidy. However, it rarely meets its commitment in full! RISING UNDER-RECOVERIES Thus, during the first nine months of 2012-13 fiscal (April-December 2012), these PSUs had...
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No case for hike in KG gas price
Arvind Kejriwal has expressed serious concern over the price hike in gas supplies from RIL’s KG fields. He has also alluded to a bonanza of Rs 45,000 crore that would accrue to Mukesh Ambani over the next two years. Whether or not the Government acquiesces to RIL’s demand for hike in price from the existing $4.2 per mbtu (million British thermal unit) to around $14 per mbtu is a matter on which the EGoM has to take a call. However, what it will have in store for the economy is an issue that we need to seriously consider. India imports 80 per cent of its crude requirements. Apart from being a cleaner fuel, gas offers enormous scope for reducing import...
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