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The Cabinet Committee on Economic Affairs (CCEA) on Thursday decided to double the price of domestic natural gas, from $4.2 to $8.4 a million British thermal unit (mBtu), from April next year - a decision that might hit the power and fertiliser sectors the most.
"The government on Thursday decided to revise the natural gas price on the basis of the suggestions made by the Rangarajan committee last year. The new mechanism will be applicable from April 2014 and the price will come up for a quarterly review after that. This will be applicable for a period of five years," Petroleum Minister M Veerappa Moily confirmed to Business Standard.
According to an official source close to the development, CCEA, headed by Prime Minister Manmohan Singh, decided the government would absorb the losses the power and fertiliser sectors were going to face. However, the quantum of absorption would be determined by the ministries concerned. The decision could cause a loss of Rs 42,000 crore for about 28,000 Mw of power capacity dependent on gas, while the fertiliser subsidy might rise by Rs 13,200 crore a year. On the other hand, the price increase to $8.4 an mBtu will add Rs 21,000 crore annually to the profits of major public and private sector companies. (WHAT THE HIKE MEANS)
Accepting the formula suggested by the Rangarajan panel, headed by the PMEAC chairman, also means the power and fertiliser rates will go up, as the affected companies are likely to pass on the cost to consumers. The committee had given its report in December last year.
Before this, in May 2010, the price of administered gas had last been more than doubled from the previously subsidised level of $1.8 an mBtu to $4.2 an mBtu, bringing it on a par with the price of RIL's KG-D6 output. The major gainers of today's price hike could be state-run ONGC and OIL, besides private companies RIL and Cairn India.
The Rangarajan panel had proposed a pricing mechanism that would take an average of the US, Europe and Japanese hubs and then average it out with the netback price of imported liquefied natural gas (LNG) to decide the sale price of gas produced domestically. The government has already appointed another committee under Vijay Kelkar to work on a road map for gas pricing after 2016-17.
“For the industry, this is a welcome decision. A dollar $4.2 per mmBtu hike means that ONGC would add another Rs 8000-8500 crore to our profit after tax. But it would not have a major impact on our cash retention due to our subsidy burden and dividend,” said A K Banerjee, director (finance), ONGC.
