Gas price fixation-I: Oil at $18/mmBtu, gas at $4/mmBtu, is it justified?

May 2A debate on what should be the right price for the domestic gas produced in the country has been going on for quite a long time, with no solution in sight. There have been innumerable suggestions, the latest being the Rangarajan committee recommendations, on the right price of gas but no decision has yet been taken by the government.
 
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The gas producers in India are up in arms against the government's lopsided policies which, they claim, have obfuscated the search and supply of hydrocarbons in India. A background note under circulation has put forward the industry's argument by claiming that when the average cost and effort to explore, drill, develop and produce an oil or gas well is the same, why is the pricing of the two products treated differently. The rates for hiring a rig to drill a well are not quoted separately for oil and gas and the companies have to pay a uniform day rate for hiring a drilling rig.
 
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The crude oil being produced, domestically or imported, is priced today at $100-110/barrels. When converted to a common metric unit, the price of oil works out to approximately $18-20/mmBtu, when the domestic gas is priced at around only $4/mmBtu, which is four and half times lower than the oil price, the note says. 
 
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While domestically produced gas is disproportionately under-priced, imported LNG is selling at an average of $13-14/mmBtu. This gives an impression that India is more fixated on importing LNG than focused on the domestic investment in the gas sector in India. It seems that the country sees merit only in transferring value to the importing countries -- which is pegged at around $2-3 trillion -- such as Qatar, Australia and others, the note claims.
 
8The gas producers are of the view that only market-linked domestic gas prices can maximize activities required to unlock the full E&P potential of India. Right investments will only follow when there is a right regulatory and policy environment which encourages market driven prices without any discrimination in tax and fiscal policies between oil and gas.
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Gas price fixation-II: "Rangarajan recommendation will destroy India's domestic gas sector"

May 2There are many sorts of opposition to the Rangarajan Committee recommendations. Some -- like the power and fertilizer lobbies -- think that the gas price resulting from the Committee's recommendations will be unaffordable while there are others who feel that the price is too low to spark adequate investment in the oil and gas sector in India.
 8The gas producers are of the view, according to a background paper under circulation, that while questions have been raised on the viability of the power and fertiliser sectors, if the gas price is raised in line with the Rangarajan formula, the fact remains that it will still not be sync with the pricing of oil and India will have to increasingly rely on imported gas in the long run which is not going to help in any way. Thus, if implemented, the Rangarajan formula would end up destroying the domestic gas sector.
 
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It has been further argued that the Rangarajan Committee formula does not address the real problem, which is perpetuating an addictive subsidised energy pricing regime for the gullible Indian consumer. Since the formula falls short of market level pricing, it hovers in the range of $8-$8.5/mmBtu. This remains an artificially derived gas price which would create market imperfections thereby leading to other imbalances in the future. 
 
8For a consistent supply of gas, only market prices will allow the possibility of developing all Indian hydrocarbon resources, including the challenging reserves and resources in ultra-deepwater and frontier areas.
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Gas price fixation-III: Some pertinent questions

May 2Some pertinent questions that have been raised by the the background paper are as under:
 
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Is the domestic gas supply economy being artificially depressed -- by not resorting to market-driven gas price -- as compared to the domestic oil supply and LNG import economy?
 
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Why is the situation allowed to perpetuate? Is it the trader lobby, which does not want domestic production to grow in order to ensure that their business is sustained?
 
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If the situation is allowed to continue, the domestic hydrocarbon resources of ~164 trillion cubic feet (as per DGH's estimate) will remain a mirage for the Indian people. The domestic gas sector will never be able to achieve its full potential.
 
8Why is the government not doing enough to reduce the disparity between oil and gas tax policies? Interestingly, the seven-year tax holiday for gas has been withdrawn, while it remains in place for oil production under NELP.
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