Cabinet expected to look at subsidised gas pricing

Vol 12, PW 26 (04 Jun 09) People & Policy

When it meets, India’s new cabinet may be asked to approve a long-running demand by ONGC and Oil India for a sharp upward revision in the price they are paid for gas produced from fields outside the NELP regime.

Last month, the oil ministry prepared the rough draft of a â€کNote’ for cabinet asking for a hike in the prices paid to ONGC and Oil India, which have remained unchanged since July 1, 2005 – almost four years. Under the rates agreed then, customers pay monopoly transporter GAIL a fixed rate of Rs3200 ($70) per cubic metre for gas from ONGC, while GAIL is paid Rs1920 ($43) for gas from Oil India – mainly by customers in the economically backward north-east region of India, where it produces most of its gas.

Before 2005, customers paid GAIL Rs2850 ($63) for ONGC gas while GAIL was paid just ($37) for gas from Oil India. But we now understand the oil ministry wants to raise prices significantly, to bring them in line with the landfall price of $4.20/mmbtu that the government has set for D6 gas.

If the cabinet agrees, this could signal the end of the special subsidy regime enjoyed by some customers, especially in north-east India, good for Oil India’s bottom-line, but delicate to implement politically. We understand there are divergent views within the oil ministry whether to allow gradual price increases or a one-time increase for non-subsidised gas to the level of the D6 landfall price.

“ONGC ultimately wants to get the rate Reliance is getting ($4.2.mmbtu),â€‌ comments an analyst.

Using a â€کbase’ rate of Rs3600 ($80) paid by customers to GAIL for ONGC gas, the oil ministry says this year GAIL should be allowed to charge Rs3765 ($84) per cubic metre for ONGC gas. To support its argument, the oil ministry reveals that the average price of free-market gas in India today is Rs9451 ($210) per cubic metre – more than double the increase proposed for ONGC and Oil India, while D6 gas is priced at Rs7500 ($166) per cubic metre.