India promises speedy review of gas prices in latest budget

Singapore (Platts)--28Feb2013/650 am EST/1150 GMT


Indian Finance Minister P Chidambaram promised a speedy review of the country's natural gas pricing policy and a change in its 15-year old production-sharing contract model when announcing the country's fiscal budget for 2013-14 (April-March) on Thursday.

In a speech, telecast live on television, the minister said that Indian would move away from a profit sharing model to a revenue sharing model in new PSCs signed going forward.

The central government would review the country's natural gas pricing policy and remove all uncertainties in the next fiscal year, he said.

The government will also launch its shale gas policy in 2013-14 and expedite clearance for stalled oil and gas blocks awarded in the previous New Exploration and Licensing Policy rounds, he added.

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"While the industry was waiting for detailed action plans on the recommendations of Rangarajan committee, only a brief reference has been made. Perhaps detailed announcements on the same will be made later during the year, which will go a long way to address the concerns of the industry," said K. Ravichandran, senior vice president with rating agency ICRA.

REVENUE SHARING MODEL

The revenue sharing model, which has been recommended by the Rangarajan Committee -- a special committee set up to review India's PSC model -- envisages the post-royalty value of oil and gas be shared between the government and the contractor immediately upon the start-up of production.

The value will be linked to the average daily production and prevailing average price in a defined period, the committee said when presenting its recommendations to the government in December last year.

The basic premise for moving away from a profit sharing/cost recovery model is that exploration and production activity gets held up in a bureaucratic approval process that requires the authorities to closely review a contractor's proposed capital expenditure on the block before allowing development to proceed.

GAS PRICES

Chidambaram's promise to review natural gas pricing policy and remove all uncertainties would be welcomed by the industry, with many believing the low gas prices are a major hindrance in the development of India's gas resources.

The Indian petroleum ministry has proposed doubling the price of all domestically produced natural gas from the current $4.20/MMBtu, in line with recommendations by the Rangarajan Committee.

The Ministry of Petroleum and Natural Gas last month moved a cabinet note proposing a price hike to around $8-8.50/MMBtu.

The committee has recommended that gas prices be fully deregulated after about five years, by when it expects gas-on-gas competition for price discovery to become feasible in the country.

But until such a pricing policy becomes feasible, the committee has recommended adopting a policy based on a competitive price of gas at a global level.

It has proposed combining two methods to search for such prices: a netback price of Indian LNG imports at the wellhead of exporting countries should be estimated; the average of the prevailing price at various hubs such as Henry Hub in the US, the National Balancing Point in the UK and a netback price at the source of supply for Japan.

SHALE GAS

Chidambaram also said that India would announce its shale gas policy in the next fiscal year.

Earlier this month, Oil Minister Veerappa Moily told reporters that the ministry has received comments on the draft shale gas exploration policy and expects the shale gas policy to be announced in a month's time.

Meanwhile, in order to encourage investments, especially foreign investment in the E&P sector, the minister said clearance for stalled blocks would be expedited.

A new Cabinet Committee on Investment for speedy clearance of projects has been constituted under the chairmanship of the prime minister and in its first meeting in January it tried to resolve issues raised by the defense ministry that affect 39 E&P blocks. The committee asked the defense and oil ministries to resolve the issues within a month.

The defense ministry has declared seven offshore blocks as "no-go areas" and imposed stringent conditions for exploration in another 32 offshore blocks, including Reliance Industries' deepwater KG-D6 blocks.

The defense ministry has stalled work on these blocks amid concerns that they are located in naval exercise zones or areas that fall under the Indian Air Force Danger Zone.

--Mriganka Jaipuriyar, mriganka@platts.com

--M.C Vaijayanthi, newsdesk@platts.com
--Edited by James Leech, james_leech@platts.com