Need to fix gas price rates in rupees

A guestimate would put the dollar-rupee conversion rate to be around Rs63. What will happen if the crude oil or gas price goes up dramatically due to unforeseen circumstances, including war-like situation in the Middle-East or elsewhere? Once this price is gazetted, it would actually become due for revision only in April 2015

 

Practically six months after it was due to have been put into effect on 1st April, gazetted and yet not made applicable due to ensuing elections, and subject to debates and discussions, the National Democratic Alliance (NDA) government at last has settled the score to set the domestic gas price to $5.6 per unit, not $8.4 as indicated earlier by the former government. Is this a concessional, discounted rate?

 

Anyway, this works out to be roughly 33% higher than the price in operation at $4.2 but becomes effective from 1st November. This price of $5.6 would be reviewed every six months so as to "ensure stability in the market". This move may have been caused by the fall in the international market price and the glut situation in the crude oil business.

A guestimate would put the dollar-rupee conversion rate to be around Rs63. What will happen if the crude oil or gas price goes up dramatically due to unforeseen circumstances, including war-like situation in the middle-east or elsewhere? Once this price is gazetted, it would actually become due for "revision" only in April 2015.

 

According to the press reports available, the new price of $5.6 per mmBtu is based on gross calorific value, which includes "impurities". However, the effective price for net calorific value would work out to be $6.17 per unit, as stated by the Finance Minister, Arun Jaitley. The fuel retail price, from now onwards, would be "linked" to the global oil prices.

 

The press reports further indicate that the critical part of the announcement is the decision to allow a premium on this price to gas produced in ultra-deep waters, deep waters and technologically "challenging" areas. This new price, it is stated, does not apply to D1 and D3 fields of Reliance Industries Ltd and that the differential amount would be deposited in Gas Pool Account till the outcome of the arbitration process.

 

These two fields are located in the deep water fields of Kaveri-Godavari basin. It remains to be seen whether the gas produced from these fields would attract a premium over $5.6 per mmBtu, because of their location?

 

On the whole, prima facie, it would appear that this long over due revision would benefit ONGC, Oil India, Cairn and Gujarat State Petroleum Corporation besides Reliance when applicable. At the same time, this will also give much needed reassurance to international investors that the government wants to encourage them to participate in such exploratory programmes.

 

It may also be remembered that Reliance inability to supply the contracted quantity earlier, due to "geographical surprises", which is under arbitration, needs to be kept in abeyance because they were supposed to make the loss of the quantity not supplied earlier.

 

In announcing this price, the government also deregulated the diesel prices and it was reported in the media that IOC chairman confirmed the system of revising prices every month, based on the international price fluctuation. The revision of price would have a rippling effect on freight rates thus helping to moderate inflation while the subsidy burden on fertiliser may increase but which could be offset by the higher income obtained due to higher price for the government. Would the government consider a reduction or withdrawal of fertiliser subsidy or even permit the manufacturers to decide the price issue?

 

This price fixation will be considered a Diwali gift for the promotion of business and industry and one may expect it to be welcomed in Dalal Street.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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