Tariff & Pricing
Gas price
P. R. Dhariwal
The author presents the various factors and their interplay behind gas pricing
modality vis-a-vis the present price structure.
1. Present Price Structure 2. Proposal to Increase Gas Price
T
he current floor price of There is a proposal to increase the
Natural Gas is Rs 2150** and Gas prices based on following
ceiling price is Rs 2850** per changes:-
thousand standard cubic meter
a. Gas price should be linked to
(scm). The Gas prices are linked to 100% parity with imported basket
basket of Low Sulphur/High Speed of Fuel Oil prices.
(LS/HS) fuel oil. During 1997-98 the
b. Remove ceiling price concept and
gas prices were 55% of basket of fuel
allow free pricing with effect from
oil which has gradually increased to
01.10.2003.
75% for the year 1999-00. The prices
are revised every quarter depending As a first step Group of Ministers
upon the average price of basket of (GOM) have recommended for increase
fuel oil prices. In addition to the in ceiling price from Rs.2850/- per 1000
prices fixed above, transportation scmd to Rs.3200/- per 1000 scmd and
charges, royalty and sales tax etc. are also increase of Rs.10 per 1000 scmd
levied. The total landed price for the on HBJ transportation charges.
consumer is as under say consumers Based on the above proposals the
for the state of Gujarat : - basic price of NG will increase to Rs.
Elements Further Amount 3200/- per 1000 scmd immediately and
of Gas Cost description in Rs/ to Rs.6000/- per 1000 scmd with effect
'000scm from 1.10.2003 which means an increase
of over 100%.
Basic Price Consumer Price 2850
(max) 3. Important Aspect
Royalty 10% on 226 It is essential to understand the
Producers' price following aspects before a decision is
Sales Tax+ 20+10% 677 taken to increase the gas price of
Surcharge natural gas :-
Transporta- Fixed 1150 a. Use and advantage of Natural Gas.
tion charges In India use of NG is about 8% as
Total 4903 compared to US @ 42-50%. The lower
use of NG in India is because of
Executive Director, Essar Steel scarcity of indigenous gas.
Limited.
Current supply of gas in India is
** October 2003
around 72 mmscmd. Out of which 82%
is used by Power & Fertilizer
industries. 6% is used by Sponge Iron
and balance is used by Transport,
Chemical sectors and other industries.
NG is mainly used either as process
media/feed stock or fuel. NG is a clean
form of energy and therefore gas based
manufacturing process is environment
friendly. During 2002 Hon'ble Supreme
Court ordered to allocate and supply
gas on priority to transport sector to
control pollution in the cities.
The economic advantage of using
gas is basically to reduce gestation
period of implementation of projects
thereby reduction in the capital cost.
Transportation of gas is done through
pipeline which reduces the traffic
burden on the road, rail and water.
Plants are easy to operate at optimum
level, which reduces the maintenance
cost, downtime of the plant and brings
optimum productivity.
NG is mainly used in infrastructure
and core sector industries and
therefore it plays an important role for
economic development and
environment friendly industrialization
and also in transport system.
b. Demand & Supply scenario
Projection of gas demand made by
agencies indicate a wide and growing
gap between demand & gas supply.

As per vision 2025 the demand is
expected to go upto 391 mmscmd. As
against the current allocation of 104
mmscmd, the supply is only 72 million.
However with the increased new
deposits, the supply of NG is expected
to increase to around 125 million in next
2/3 years time. Substantial reserves in
KG basin, north eastern states,
Gujarat, Rajasthan etc are already
found. Further NG is expected to be
sourced through CBM route. The
supply is also expected to increase
marginal with efforts in reduction and
in flaring and shrinkage of NG.
The marginal gap if any in the
future between demand and supply is
expected to be met by import of LNG
from sources such as Middle East,
South East Asia, Austrialia etc. It is
expected that 2 LNG terminals may be
commissioned within 2 years time. In
addition there is a proposal to lay
pipeline through Bangladesh, so that
gas can be transported cheaper from
north eastern states as well as import
of gas from Bangladesh. Gol have
taken steps for import of gas from
Middle East at a reasonable cost,
however these project could not yet
started due to technical and geo-
political reasons.
c. Gas producers in India
ONGC/OIL are the main producers
of the gas in India. ONGC is operating
the western offshore fields and in other
states. Oil produces gas in Assam and
Rajasthan.
ONGC has participating interest in
JVs with Reliance & British Gas in
Panna Mukta, Videocon in Raava
Fields. Further, Niko & GSPC combine
and Cairn Energy produce gas to the
extent of 3 millions in Gujarat.
As regards new finds in KG Basin,
Rajasthan, Gujarat, North Eastern
States, major players are Reliance,
GSPC, Niko, GAIL, Cairn Energy etc.
Gol has granted licence to ONGC,
Essar, Reliance for exploration and
Tariff & Pricing
production of gas through CBM route.
d. Current cost of production of
natural gas
The cost of production of NG
produced by ONGC is Rs.1800/- per
thousand scmd (1 US$/MMBTU). It is
understood that NG produced in
Middle East is around US$ 0.50
MMBTU. Around 60% of total gas is
produced alongwith curde oil as
associated gas. Balance 40% is free
gas. Wherever crude is produced as
major product, cost of NG is lower.
e. Cost competitiveness of user
industry
The major user of NG primarily are
Fertilizer, Power & Steel sectors. These
sectors are core / infrastructure sectors
and are not cost effective in India
because of many reasons. The cost of
these products are already high. Gol
have realized the cost aspect and
therefore allowed subsidy for Fertilizer
Industry and allowed fixed rate of
return on capital for Power industry
and also subsidized rate for certain
power consumers.
As regards Steel is concerned, Steel
industry has passed through a
historical bad period for last 4 years
and steel prices are market driven
prices. The government does not give
any subsidy either to Industry or to
the consumers.
Neither the industry nor the
consumers can afford any increase in
gas price as with the current price itself
the final products are not competitive.
The existing cost of production itself
is non competitive in case of Fertilizer
and Power. Steel industry also can not
afford any increase in the price nor
Steel Industry would be able to pass
on the increased cost on account of
increase in the NG price to its
consumers. The current price of
Fertilizer is around Rs.4300/- per MT,
with the proposed increase the Fertilizer
cost would go up from Rs.4300/- to
Rs.8700/- PMT, variable cost of power
would go up by Rs.1 per unit and
Sponge Iron cost would go up by
Rs.1400/- per
Ton. The cost of production of
Steel accordingly would go up by
Rs.1800/- PMT.
f. Concept of market driven prices
The concept of market driven
prices propagated in the field of NG is
incorrect as the prices are fixed by
Government of India under APM and
supply is much lower than the demand.
It is therefore a monopolistic business
for gas supplier today. The market can
decide the price only when supply is
equal or more than the demand.
Without bridging the gap between
supply and demand if Gol allow the gas
supplier to charge higher price,
naturally it would be a monopolistic
situation and therefore the price and
terms would be fixed accordingly. The
current monopolistic situation will
allow few corporates to charge
abnormally high prices. The current
demand and supply situation have not
yet riped to have market driven prices.
g. Increase in gas price
Since there is a large gap between
demand and supply, Gol decided to
invite investment in the gas Sector to
explore the new sources of NG. In the
process some multinationals started
studying and decided to invest in
exploration & production of NG in the
country and also to import LNG as a
substitute for NG. Some corporates
have already signed MoU and set up
joint venture Companies. These
corporates have seen a great potential
in the demand of NG and therefore
started pressurizing and convincing
Gol for increase in NG price, so that
they can make large profit due to huge
gap between demand and supply. Gol
have already allowed JVs to charge
price between Rs.3900/- per 1000 scmd
& Rs.5700/- per 1000 scmd (USD 2.11
to 3.11/MMBTU).
These corporates have some how

convinced the Gol to link indigenous
gas price with 100% parity with fuel oil
import basket. Based on these
concepts NG price was fixed in 1997
and thereafter many proposal were
made so that the gas price can be
increased by over 100%.
Since Gol have already allowed JVs
to charge NG price at USD 3.11/
MMBTU, the LNG importer are
therefore quoting the prices over USD
3.11/MMBTU.
4. Question Unanswered
The basic question remains
unanswered are :-
1. How Government of India allowed
JVs to charge the NG price of over
2 to 3 times as compared to the
prevailing cost of NG to ONGC, who
are the major producers of Gas.
2. Why corporates are allowed to sell
gas at abnormally high price in the
market when (a) cost of production
is very low. (b) Gas prices and
allocation are decided by Gas
Linkage Committee (GLC) which is
an interministerial committee with
representatives from Planning
Commission and the Ministries of
Finance, Power, Chemical &
Fertilizer & Steel and are controlled
through Administrative Price
Mechanism. (c) Time to bring
market driven prices have not yet
riped for gas due to a very large
gap between demand and supply
and natural gas is still monitored
through APM.
3. Why selling of imported LNG is
allowed in free market without
monitoring through APM. Why
LNG importers are not asked to
match the price of indigenous
natural gas price due to essentiality
requirement of NG in India and also
to minimize the price of Fertilizer &
Power thereby to reduce the
subsidies and further
industrialization through
environment friendly process/
route .
Tariff & Pricing
5. Need of Hour be through Gas Regulatory
a. Use of NG plays an important role Authority.
in our economic development, Caution
setting up environment friendly Any increase in gas price would
process based industries and amount to giving benefit to few
transport sector. There is an corporates at the cost of 1100 million
immediate need to increase the use consumers as with the increase of NG
of NG. price the cost of Fertilizer, Power,
b. To encourage and reduce the risk Industrial and Agro products would
on investment in gas sector, there go up substantially with an immediate
is immediate need to assure the effect. Further invest-ments of
return on capital on investment like thousands of crores made in
it is already prevailing for Power, environment friendly gas based
Fertilizer & gas pipeline etc., process technology would go waste
c. The NG price should be cost + due to non affordable gas price as
return so that the gas is available these processes can not use any
to the users at competitive prices. other process media.
d. Gas price should not be linked with
imported basket of fuel oil because
i) Gas is produced in India and ii)
fuel oil can not substitute NG where
the NG is used as process media.
e. There is no need to increase any
price of NG as current price of NG
itself is much higher than the cost
of production and reasonable
margin of profit.
f. To review and reduce the price
already fixed with JVs. LNG
importers must match the price with
indigenous gas price. The import
of LNG would be marginal in view
of increased gas supply scenario
in the country .
g. Gol should not increase any
subsidy in line with concept to
demolish the subsidies. Increase in
gas price, if any, would amount to
increase in subsidy in fertilizer and
power sector.
h. Government of India should not
allow to waste the investments of
thousands of crores already made
on environment friendly gas based
process technology plant. These
plants can not use any other
process media and investments
were made based on the prevailing
prices with marginal variations.
i. Any price increase in NG should