Panel seeks review of Rangarajan formula on gas pricing

• The Standing Committee on Petroleum and Natural Gas has sought a review of the Rangarajan formula for gas pricing, saying that the price should be fixed after factoring in the domestic cost of production.
• Recommendation of the Committee:
• According to the committee, the proposed formula is a simple average of two methodologies-  price of imports of LNG into India by different suppliers and weighted average of prices of natural gas prevailing at Henry Hub in USA, National Balancing Point (NBP) in London and netback import price at the well head of suppliers into Japan. Also the benefit of lower gas price at Henry Hub has been largely diluted by the inclusion of Japan’s liquefied natural gas prices, which includes 60%  royalty component linkage to Japanese Crude Cocktail and host of other factors.
• The panel, headed by Andhra Pradesh MP Aruna Kumar Vundavalli, was of the view that Russia, which exports 40 to 50 % of its gas to Europe at a price of about $8.77 per mBtu, could be a better indicator of gas price. Russia is the world’s second largest gas producer and consuming country in the world and its prices could be incorporated as one of the reference price in the pricing formula.
• The committee also pointed at omission of domestic cost of production of natural gas, which ranges from $2.48 to $3.63 for private and public sector firms, in the formula.The committee has recommended factoring domestic cost of production of gas for arriving at the price, and fixation of price of gas in rupee terms.
• According to the Rangarjan pricing formula, the price will be revised quarterly. Prices for each quarter will be calculated based on the 12-month trailing average price with a lag of one quarter (i.e. price for April to June 2014 will be calculated based on the average for 12 months ended December 31, 2013). Using the approved formula, gas price in April-June (2014) is estimated at $8.2-8.4, nearly double the current selling price of $4.20.