Rangarajan panel recommendation of pricing natural gas at an average of international gas hub prices has not found favour with user ministries of power and fertiliser as well as the finance ministry.
While Power Ministry says the impact of gas price rising from $ 4.2 per million British thermal unit to $ 8.8 per mmBtu would be about Rs 29,800 crore on existing electricity producing plants, the Fertiliser Ministry said higher gas price would result in Rs 10,000 crore per annum increase in urea subsidy.
The Finance Ministry felt there was no justification for determining domestic gas price through a complex averaging of international prices and imported LNG as UK and Japanese market were neither representative of the international producers nor were relevant to India, sources said.
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The panel headed by C Rangarajan, Chairman of Prime Minister's Economic Advisory Council, earlier this year suggested a complex methodology to replace current gas prices.
In first step, weighted average of prices prevailing at US Henry Hub, National Balancing Point of UK and netback wellhead of price of supplies into Japan was to be derived. This was to then be averaged out with actual cost of imported LNG into India.
This formula translates into a gas price of $ 8.5-8.8 per mmBtu.
Sources said the Power Ministry in its comments on the Cabinet note floated by the Oil Ministry for changing domestic gas pricing based on the Rangarajan panel recommendation, said every dollar increase in gas rate would result in additional burden of Rs 6,450 crore on existing gas-based power plants.
For gas prices going up from $ 4.2 to $ 8.8, total impact would be Rs 29,800 crore, it said adding states would find it difficult to absorb such costly power.
Fertiliser Ministry said every dollar increase in gas price would lead to cost of urea production going up by over Rs 2,466 crore, all of which has to be made good by the government by way of subsidy.
At $ 8.8 per mmBtu gas price, the enhanced cost of production would result in Rs 10,000-crore additional subsidy outgo, they said.
Sources said Finance Ministry asked Oil Ministry to come up with an alternative formula based on well head prices of suppliers in Qatar, Oman, Abu Dhabi and Malaysia.
It felt there was no logic of including Japanese price as Tokyo imports gas at a very high price post Fukushima nuclear disaster.
Also, total consumption in Europe artificially distorts the high National Balancing Point (NBP) hub price.