Thursday, May 20, 2010

Cabinet increases natural gas prices

The Union Cabinet today effected an increase of over 113 per cent in the prices of natural gas produced by public sector companies Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL). These companies will now realise a price of $3.82 per million British thermal units (mBtu), compared to the existing one of $1.79. However, consumers of this gas, which mainly comprise the power and fertilizer sectors, will have to pay $4.2 per mBtu (inclusive of a 10 per cent royalty on the base price). This is equivalent to the price of $4.2 realised by Reliance Industries from its prolific KG-D6 gas block.

This gas, also known as the administered price mechanism (APM) gas, is produced from the fields earlier given to these companies on nomination. The price of APM gas was last revised in 2006. The new price is valid till March 31, 2014.

The low prices of gas have discouraged state-run oil companies from making investments in these blocks. Therefore, it became essential to increase the price of APM gas - Cabinet.

The increase would mean an increased fertiliser subsidy burden. The retail prices of fertiliser are capped by the government and any increase in input cost is offset as subsidy. The difference between cost and the maximum retail price (MRP) is released as fertiliser subsidy to manufacturers and importers. In case of power, any increase in input can be passed on to consumers. The power and fertiliser sector together account for 75 per cent of APM gas consumption. The total output of APM gas is estimated at 45 million standard cubic metres of gas a day (mmscmd).

ONGC –“This hike will also help us to wipe out the underrecoveries that were being incurred.” The state-run company incurred underrecoveries or revenue loss of Rs 4,745 crore from sale of 17.71 billion cubic metres of APM gas in 2008-09.

With this increase, ONGC’s revenues from APM gas will increase by Rs 6,550 crore to Rs 12,350 crore. While assuring better revenues to ONGC and OIL, the move will also bring a level-playing field between consumers of APM and non-APM gas.

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