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Gas price formula: Govt looking at alternatives

Richa Mishra

High-level panel set up in the wake of RIL-RNRL row

The committee will look at the options only when open competitive bidding route has not been adopted, or it was not feasible for the seller to follow open competitive bidding process.

New Delhi , Aug. 12

Learning from its recent experience over gas pricing, the Petroleum Ministry is now examining various alternatives for approving the price formula under production sharing contract (PSC) in situations where open competitive bidding process to discover the end price has not been adopted by the seller.

Sources told Business Line that a high-level panel constituted by the Ministry is looking at alternatives. These include linking the gas price to a basket of freely traded fuels in international markets, indexing on the basis of imported liquefied natural gas (LNG), indexing to prices determined in other competitive market in the region and/or international exchanges, or any combination of these formulae and work out a guideline if a transparent mechanism has not been adopted by the seller.

Transparent process

The Ministry, which has been caught in the crossfire between the Ambani siblings dispute over gas price, has been maintaining that the seller should adopt a transparent open competitive bidding process to discover gas price. "Ideally, the prices ought to be determined through an arms length approach. However, where no such mechanism has been followed by the seller, alternatives need to be considered," sources said.

Elaborating, the sources said the committee will look at the alternative options only in the situation where open competitive bidding route has not been adopted, or it was not feasible for the seller to follow open competitive bidding process, or the Government has reasons to believe that the bidding process followed by the seller was not transparent.

In the last few months, the Mukesh Ambani-led Reliance Industries Ltd (RIL) and Anil Ambani-controlled Reliance Natural Resources Ltd (RNRL) have been in the news with the Government deciding to reject RIL's proposal to sell gas to RNRL at $2.34 per million British thermal unit (mBtu) on the grounds that it did not agree with the valuation formula.

In order to avoid such situations, a committee has been set up to formulate transparent guidelines for approving gas pricing formula and the basis for giving Government approval under the production-sharing contract.

Clarify norms

The high-level committee, which has been asked to submit its report within two months, has already held two rounds of meetings. Sources were quick to point out that there would not be any change in the existing provision of the production-sharing contract.

The Government has signed several contracts under the New Exploration Licensing Policy (NELP) and Coal Bed Methane (CBM) rounds. With further offer of blocks being made, the number of contracts will go on increasing, sources said, adding that these contracts provide freedom to contractors for selling gas in India. The contracts require approval of the Government on the gas price formula/basis for the purpose of valuation of natural gas for computing cost petroleum, profit petroleum and royalty, and other calculations required under PSCs and CBM contracts.

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