Prime Minister Narendra Modi unveiled its biggest reform so far on Saturday, aligning diesel prices with international crude oil costs, a move that will make the key fuel cheaper by Rs. 3.37 a litre and help control inflation. Government also hiked natural gas tariff by 46 percent that will push up fertiliser, power, CNG and PNG rates.
This will be the first reduction in diesel rates in over five years. Diesel price were last cut on January 29, 2009 when they were reduced by Rs 2 a litre to Rs 30.86. Rates had since climbed to Rs 58.97. It will cost Rs 55.6 per litre in Delhi.
The move also eases the government’s huge subsidy burden paid out of the budget. In the first quarter of this fiscal (April-June 2014), the under-recovery burden on oil marketing companies was Rs 9,037 crore which would have required a sharing mechanism between the budget, consumers, OMCs and upstream oil and gas companies.
Against the backdrop of the steep doubling of rates to USD 8.4 recommended by Ranagarajan Committee and cleared by the previous UPA government, the government today approved a 46 per cent increase in natural gas prices that will go up from current USD 4.2 per million British thermal unit to USD 6.17 per mmBtu from Nov 1.
The gas price hike, according to a modified formula approved by the Cabinet, comes to USD 5.61 per mmBtu on gross-calorific value basis and USD 6.17 as per net calorific value – the principle used for calculating current USD 4.2 rate.
RIL will however not get the new gas price for its currently producing Dhirubhai-1 and 3 gas fields in eastern offshore KG-D6 till it makes up for the shortfall in production in the past four years.D1&D3 is producing under 8 million standard cubic meters per day against a committed 80 mmscmd. Consumers of RIL gas will have to pay higher rates but RIL will get only USD 4.2, with the difference being credited to a gas pool account maintained by GAIL.
RIL will get the higher price if it is able to prove legally that output fall was not deliberate and was due to geological reasons as it claims.
Higher gas prices would increase the expense of running power stations and fertilizer plants, raising infrastructure and food costs and accelerating the rate of inflation.
Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7 per cent of the nation’s power generation capacity based on gas).
Also, there would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.
Gas price increase had been deferred on three occasions previously.
The previous UPA government had in June last year approved a price formula suggested by a panel headed by C Rangarajan and re-confirmed it in December 2013 with certain conditions for Reliance Industries’ eastern offshore KG-D6 block.The formula was to be implemented from April 1, 2014, when the tenure of USD 4.205 per million British thermal unit price fixed for KG-D6 gas was to expire, but before a rate could be notified, general elections were announced and Election Commission asked the then government to defer it till completion of polls.
On June 25, the new BJP-led government deferred it for a further three months to September-end saying the issue required “comprehensive consultations.”
The revision was again deferred by 45 days on September 24 as the government seemed wary of taking an unpopular decision on just before assembly election in crucial states of Maharashtra and Haryana.
The formula, which was notified on January 10, will more than double the current USD 4.2 per million British thermal units. The new gas price was to be applicable to both state-owned ONGC produced fuel as well as private sector RIL’s gas.
The delay in gas prices had most affected Reliance Industries and state-owned Oil and Natural Gas Corp (ONGC). RIL and its partners BP plc of UK and Canada’s Niko Resources on July 6 slapped an arbitration notice on the government seeking implementation of a gas price revision which was due to them on April 1.
For ONGC, the nation’s largest gas producer, the postponement of price increase was seen as a dampener to its stock valuation particularly when the government had plans to sell a 5 percent stake in the company to help narrow budget deficit.
India’s offshore oil and gas industry is “at risk” in the absence of higher gas prices, BP CEO Robert Dudley had said on June 17.
RIL has been selling gas from KG-D6 at the same price since it started production in April 2009. The government increased ONGC and Oil India Ltd’s selling price to match RIL’s in May 2010.