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Cap in gas pricing formula in the works to combat global volatility

The govt is examining a proposal to tweak the newly approved gas price formula to bring in a cap with the aim of protecting consumers from volatility in the international market.

, ET Bureau|
Dec 30, 2014, 04.00 AM IST
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The govt is examining a proposal to tweak the newly approved gas price formula to bring in a cap with the aim of protecting consumers from volatility in the international market.
The govt is examining a proposal to tweak the newly approved gas price formula to bring in a cap with the aim of protecting consumers from volatility in the international market.
NEW DELHI: The government is examining a proposal to tweak the newly approved gas price formula to bring in a cap with the aim of protecting consumers from volatility in the international market. Under a formula approved by the cabinet on October 18, the prevailing domestic rate is aligned with global benchmarks. As a result the price of gas, which was set at $5.61 per unit from November 1 this year, was potentially liable to change every six months.

According a recent Cabinet decision, the Directorate General of Hydrocarbons (DGH) will examine the concept of a cap in the recently approved price formula under which domestic gas price was set at $5.61 per unit. The gas pricing mechanism approved by the cabinet in October was based on the recommendations of a committee of secretaries (CoS), which had also proposed a cap on the price, government sources said.

“The suggestion to impose a cap on the gas price has to pass the tests of legal tenability, economic determinability and reasonability. Hence, it is proposed that in the first instance, DGH may examine this suggestion. Thereafter, based on DGH’s report a decision may be taken with the approval of the minister in-charge of the ministry of petroleum and natural gas and the finance minister,” one source, aware of the Cabinet’s decision, said. The oil ministry did not respond to ET’s email queries.
Oil and gas industry officials criticised the idea, calling it a regressive step. “The economic viability of several discoveries are already doubtful with recently approved gas price of$5.61 per unit, which is about one-third of the price of imported gas,” CEO of an energy firm said requesting anonymity.

Cap in gas pricing formula in the works to combat global volatility

Officials with knowledge of the matter said CoS had asked the Cabinet to consider a cap, as gas consumers had sought introduction of a ceiling. Officials from the oil and gas disputed this logic. “When there is no floor price, demand for a cap is unreasonable. Will the government protect gas producers if international prices crash? If India wants to invite investments and technology in the oil and gas sector, it should allow market price of gas,” an exploration expert said.

Several members of Association of Oil & Gas Operators (AOGO) said India’s pricing policy discourages natural gas production. “This is not good for a country which is heavily dependent on energy imports,” said an AOGO member, who did not wish to be named.

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