On 1st April, 2014, the current agreement with Reliance Industries for its gas from the KG Basin will expire. This contract has a clause linking it to global oil prices, with a maximum of $60 per barrel, which is below current levels. It effectively capped domestic gas prices at $4.2 per mmbtu. The Rangarajan committee has recommended that the domestic gas price be indexed with international prices, which implies that the present practice of the Administered Pricing Mechanism (APM) will be scrapped.
Validity & Duration
New formula is valid for 5 years from 1st April, 2014. It applies only to new contracts or renewal contracts when existing ones expire. It does not apply to contracts which contain a specific formula for natural gas price indexation or fixing.
Benchmarks
As per the Rangarajan Committee, there are two broad elements which are used for an average which will be used as an unbiased arm's length price.
1. Netback Price - Price obtained by taking the cost of Liquefied Natural Gas (LNG) imports into India under long-term contracts after removing charges such as transportation to obtain a theoretical price at the point of production in exporting countries.
2. Weighted average of prices at three major gas trading points - the hub price at Henry Hub in the United States, the price at the National Balancing Point of the UK and the netback price at sources of supply for Japan.
Review and Timeline
The prices will be reviewed every quarter, moving away from the monthly reviews to reduce volatility and make it easier for investment decisions.
For both pricing elements, the formula will take the average prices for the four quarters preceding the quarter before the review. For instance, for the quarter starting 1st April 2014, the formula will be based on the four quarters ending December 31, 2012.
Arm's Length Price
The arm’s length price is computed as the average of the two price estimates. This will apply equally to all sectors, regardless of their prioritisation for supply under the Gas Utilisation Policy.
Source: Indian Energy Sector
Validity & Duration
New formula is valid for 5 years from 1st April, 2014. It applies only to new contracts or renewal contracts when existing ones expire. It does not apply to contracts which contain a specific formula for natural gas price indexation or fixing.
Benchmarks
As per the Rangarajan Committee, there are two broad elements which are used for an average which will be used as an unbiased arm's length price.
1. Netback Price - Price obtained by taking the cost of Liquefied Natural Gas (LNG) imports into India under long-term contracts after removing charges such as transportation to obtain a theoretical price at the point of production in exporting countries.
2. Weighted average of prices at three major gas trading points - the hub price at Henry Hub in the United States, the price at the National Balancing Point of the UK and the netback price at sources of supply for Japan.
Review and Timeline
The prices will be reviewed every quarter, moving away from the monthly reviews to reduce volatility and make it easier for investment decisions.
For both pricing elements, the formula will take the average prices for the four quarters preceding the quarter before the review. For instance, for the quarter starting 1st April 2014, the formula will be based on the four quarters ending December 31, 2012.
Arm's Length Price
The arm’s length price is computed as the average of the two price estimates. This will apply equally to all sectors, regardless of their prioritisation for supply under the Gas Utilisation Policy.
Source: Indian Energy Sector
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