In a setback to gas producers like Reliance Industries, the government today postponed revision in natural gas prices by three months pending a "comprehensive" review to make a controversial pricing formula more palatable.
The current USD 4.2 per million British thermal unit rate for gas, which would have jumped to USD 8.8 if a formula approved by the previous UPA government was implemented on July 1, will continue till September-end, Oil Minister Dharmendra Pradhan said here.
The first revision in rates in four years was originally to take effect from April 1 but with general elections being declared it was postponed by three months.
"The Cabinet Committee on Economic Affairs today decided that comprehensive discussions were necessary on the issue. It was decided that consultations would be held with all stakeholders and it was important to keep public interest in mind," he told reporters after the CCEA meeting.
Pradhan, who had held three rounds of discussions with Prime Minister Narendra Modi on the issue since Friday, did not say if a new expert committee or a ministerial group will be constituted for the review.
In course of these discussions, it was clear that the new government was looking at making some changes in the formula, proposed by a panel headed by C Rangarajan, as it would have led to Rs 2 per unit increase in power tariff and Rs 12 a kg hike in CNG rates besides jump in fertiliser subsidy outgo.
Finance Minister Arun Jaitley said a review mechanism will have to be decided by the Prime Minister's Office and the Oil Ministry.
"There have been one or two meetings. The mechanism in the government which will review the whole thing and come to an opinion, I think now needs to be finalised," he said.
Neither Pradhan nor Law Minister Ravi Shankar Prasad who briefed media persons on the cabinet decision, would say if a new formula altogether was being considered or whether the Rangarajan formula will be amended to bring down the rates to acceptable levels.
"The matter needs extensive consultations keeping the public good in mind with all the stakeholders... the new government must be given time to take a call on what should be the mechanism (of review)," Prasad said.
The postponement will be a setback of gas producers like RIL and its partner BP plc of UK who had been seeking higher rates on the ground that developing new fields in deep-sea was uneconomically at current rates.
RIL and BP have already slapped an arbitration notice on the government over delay in revision of gas prices which for their KG-D6 field was due on April 1 after the five-year validity of the old USD 4.2 rate expired on March 31.
The government has so far not joined the arbitration as the notice was in the 90-day period where conciliatory talks can take place to resolve the matter.
Sources in the oil ministry said the a reply to the arbitration notice was being prepared and will be sent to RIL-BP shortly.
The ministry, which had on April 21 informed RIL-BP that new rates would be implemented from July 1, will now send a new communication in light of the CCEA decision, they said.
As per the formula approved by the UPA government in December last year and notified on January 10, 2014, prices were to change every quarter based on 12-month average of international hub rates and cost of importing liquid gas into India with a lag of one quarter.
Consequently, the rate in April was to be based on averages of January to December 2013. So, the rate applicable from April 1, according to the formula, came to USD 8.3 but from July 1, which would take average of April 2013 to March 2014, it jumps to USD 8.8 after factoring in higher rates of LNG imports from Qatar that came into effect from January 1.
Although the weight of fuel in the headline inflation is just 9.7 per cent, half of which is made of diesel, the Narendra Modi government doesn't want to add to already high inflation ahead of prediction of a below-normal monsoon and a spike in oil prices in the aftermath of the Iraq crisis.
Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff. There would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.
If the Rangarajan formula is implemented without changes, power tariff will rise by about Rs 2 per unit and CNG rates will jump by over Rs 12 per kg in Delhi.
Sources said the new government was looking at making some changes in the approved Rangarajan price formula.
Replacing or removing some elements of the formula to bring the revised rate to USD 7 per million British thermal units, or at best USD 7.5, are among the options there were explored.
Another possibility was to allow higher prices only on output that exceeds current production, or on production from fields discovered under the New Exploration Licensing Policy such as the RIL-operated KG-D6 fields. This would exclude state-owned firms including ONGC, which produce gas from pre-NELP blocks, from the revision.
Keeping state firms out of the price revision would mean there will be no hike in CNG and piped cooking gas price because their input comes from ONGC fields.
An increase in the rate for RIL would make only fertiliser costlier, which the government can subsidise.
No KG-D6 gas is supplied to power or CNG companies and the new rate would make its deep-sea finds viable.
The Rangarajan formula calls for pricing rates at an average cost of importing liquefied natural gas (LNG) into India and rates prevailing at international hubs in the US and UK as well as the price of gas imported into Japan.
Sources said there is a thought that high-priced Japanese imports, which have no relevance to India, should be excluded from the formula to limit the gas price increase to about USD 7-7.5.
The previous UPA government had in December last year approved the new formula for pricing all domestic gas from April 1 but the general elections were declared before the new rate could be announced.
The oil ministry had on April 21 told Reliance Industries, which had been supplying gas from its eastern offshore KG-D6 field at the old price of USD 4.2 even after it expired on March 31, that the new rate will be implemented from July 1.
Sources said the government did not want to miss this deadline but given the complications of the formula, it choose to defer revision.