The gas-pricing riddle

The government has formally notified an empowered group of ministers (EGoM) to tackle the vexed issue of gas pricing.

The group will be headed by External Affairs Minister Pranab Mukherjee and will include ministers of power, chemicals and fertilisers, finance, law and justice, petroleum, corporate affairs and the Planning Commission deputy chairman as members.

It will have the challenging task of taking a decision after sifting through all that the various stakeholders are saying. Here is a run-down of the diverse views on the issue:

PETROLEUM MINISTRY

Gas price should be market-driven as provided for in the production sharing contract

Going back on contracts would lead to litigation which the government cannot hope to win

Artificially depressing prices will deter overseas oil companies from participating in future NELP rounds

The country needs gas and therefore more exploration activity should be promoted by giving incentives to oil companies

Determining the price of gas was outside the purview of the government, which only had the right to approve the pricing formula that RIL has proposed

COMMITTEE OF SECRETARIES, which has submitted its views to the PMO

RIL's gas pricing formula is not based on the competitive market environment and "unfairly exploits the situation of stranded assets of the major consuming sectors"

With cases against RIL pending in court, it would not be prudent for the government to approve the pricing formula at this stage

The CoS report has suggested that RIL's formula could be taken up only after a gas pricing policy is put in place, a policy which has been due for over six years.

PRIME MINISTER'S ECONOMIC ADVISORY COUNCIL, which was asked by the PM to study the issue

Market-determined prices for gas are necessary

The pricing formula needs some changes but is broadly acceptable

The price discovered by RIL - $4.33 per mBtu - is comparable to other existing contracts

The process of price discovery could have involved more bidders

RELIANCE INDUSTRIES, which has discovered gas in the K-G basin

Gas price should be market-determined as stated in the production sharing contract

At a base price of $4.33 per mBtu of gas, the cost of generating power would be less than Rs 2.5 a unit

It would also help save Rs 6,400 crore in fertiliser subsidy annually, as most fertiliser plants are currently using naphtha ($15 per mBtu) or fuel oil ($11 per mBtu)

The government will get $4.6 billion in profit petroleum if the K-G gas is priced at $2.50 per mBtu. But this jumps to $14.5 billion if gas is sold at around $4.5 per mBtu

ONGC, which is currently the largest producer of gas in the country

There cannot be a market-determined price "as there is no real gas market in the country where demand is double the supply"

However, it wants a higher price for gas as it is making an annual loss of Rs 700 crore at current subsidised gas prices of below $3 per mBtu.

RIL's K-G gas should be priced similar to the $ 4.75 per mBtu that Panna-Mukta and Tapti fields command

The company's $2-3 billion investment in bringing to production small and marginal gas fields was on the premise that it would get market price and the investments would not be fruitful if the price of gas is regulated

POWER AND FERTILISER INDUSTRIES, the primary users of gas

Gas prices need to be regulated to keep electricity and fertiliser cost low

Cannot allow input costs to be market-determined when the cost of the products - electricity and fertilisers - are controlled by the government

There is no real competitive market for gas, hence power and fertiliser companies bid when RIL invited them. This does not reflect the real market

Higher gas prices, at $4.5 per mBtu, will result in power and fertiliser subsidy increasing by close to Rs 22,000 crore annually.