The Big Picture – Impact of Gas Pricing and Diesel De-Regulation on Economy

• After months of delay, the government has finally come out with the new gas pricing formula even as it ended regulation of diesel prices.
• While the diesel deregulation has been widely welcomed as it was accompanied by major reduction in prices, gas pricing formula has met with mixed responses.
• The government has discarded the Rangarajan formula which had been accepted by the previous UPA government and had fixed the prices at 8 US $/MBTU.
• Instead, in a new formula worked out by the new government, the price has been fixed at 5.6 US $/MBTU.
• It may be recalled that the election commission had stayed the new price notified by the UPA government in April as it was announced after the elections had been notified.
• There are two aspects to the announced price- tenability and methodology. The improvement in methodology is the removal of indefensible inclusion of LNG.
• The new formula has added more hubs like Canadian hub in determining the price.
• The National Balancing point (NBP) of the UK, which has been taken as reference, has got a substantial share of LNG in it. The price of gas is arrived at after netting out the value of Natural Gas Liquids.
• Some experts are questioning the methodology used in arriving at the prices of the gas. They also argue that if it was done using the global indicators the price would have been much lesser.
• But the price appears to be fair.
• There is no global price for gas. Gas prices are regional like US gas prices, UK prices.
• India is a producer as well as an importer.
• The price fixed by the previous UPA government was faulty and very high as it was based on the Japanese formula. Japan is in need of much gas as most of their nuclear reactors are shut down and their increased demand is causing hike in the LNG prices.
• There are some voices coming from different industries saying that this would not promote to take up future explorations.
• The Exploration depends on prospectivity and different other incentives like tax benefits. The price by itself is not the only determinator.
• If gas is explored at a very high price which is not linked to the domestic costing, then it will unnecessarily inflate the prices.
• The demand from the companies was very high than it is fixed now.
• For every dollar increase in the gas input price, the cost of power from a gas based thermal power station is going to go up by roughly 35 to 40 paise/unit.
• Calorific Value (CV) is a measure of heating power and is dependent upon the composition of the gas. The CV refers to the amount of energy released when a known volume of gas is completely combusted under specified conditions.
• Net calorific value of a fuel portion is defined as the amount of heat evolved when a unit weight (or volume in the case of gaseous fuels) of the fuel is completely burnt and water vapour leaves with the combustion products without being condensed.
• Gross calorific value of a fuel portion is defined as the amount of heat evolved when a unit weight (or volume in the case of gaseous fuels) of the fuel is completely burnt and the products of combustion cooled to the normal conditions (with water vapour condensed as a result). The heat contained in the water vapour must be recovered in the condensation process.
• There are roughly 50 countries producing oil and there are 75 different gas prices in the world.
• The price which has been fixed excludes large number of Production sharing contracts (PSC).
• Within the PSC, the formula for arriving at Arms-length price, must be approved by the government. And each PSC should separately determine the Arms-length price.
• Gas based power plants in our country are around 10%.
• The price fixed seems to be reasonable for explorer and consumer.
• All PSCs allow for price recovery.
• As the technology improves more areas come under exploration.