Competitive bidding likely to discover gas price

The government is likely to prescribe competitive bidding to arrive at the price of natural gas produced from new fields and recommend different price in different regions.

A committee, formed by the ministry of petroleum and natural gas to formulate guidelines for approving natural gas price formula/basis for giving government approval, has suggested discovering price of natural gas from fields like Reliance Industries' D6 in Krishna Godavari basin, by inviting bids from different consumers, an official said here.

The committee was formed after the ministry rejected Mukesh Ambani-run RIL selling gas from D6 to a firm run by his estranged brother Anil at $2.34 per million British thermal units (mBtu) on grounds that the price was not arrived on arms length basis.

The five-member committee suggested competitive bidding despite the entire industry rejecting such an idea since the Indian gas market was as yet highly underdeveloped.

The industry was of the view that the economic price of gas cannot be passed onto the final consumer in case of bulk consumers like power and fertilizer units.

The official said the committee further recommended different price of natural gas in different regions and indexation of the price in the interim period. It also suggested resolution of disagreement by an independent regulator.

Incidentally, except for the recommendation of price discovery through competitive bidding, all the other suggestions made by the committee were in line with the representation made by Anil Ambani Group firm Reliance Natural Resources Ltd, the company whose contract to buy gas from D6 was turned-down.

But for RNRL, none of the representations made to the committee by RIL, BG Group of UK, Cairn Energy or GAIL suggested different price of natural gas in different regions or indexation in the interim period.

The committee has said that in the interim period, the base price from the previous gas sale contract would be used as reference for future contracts. But it has not spelt out what the benchmark would be in cases where there were no previous contract like in the case of newly discovered fields, an industry source said.

Besides, no one except for RNRL, suggested government intervention in contract resolution, the source, said adding the committee has also omitted any comments on price of transportation of gas.

A ministry official said traditionally, gas produced by national oil companies - ONGC and OIL - has been sold at a controlled price. With the advent of New Exploration Licensing Policy (NELP), however, all fresh natural gas production is to be sold in the open market at a competitively determined price.

After considerable discussions, the committee came to the view that in all situations where a price discovery through competitive bidding is possible, there should be no need to apply any other principle for valuation of gas.

The committee felt that in cases where the actual supply of gas has not yet commenced, the process of price discovery through the open market mechanism must be resorted to, as provided under Production Sharing Contract (PSC) for the field, he said.

For cases where valuation of gas has necessarily to be done by the government or sector regulator, DGH, the committee felt that it should be based on the most recent competitively determined price in the region.