Market Determined Gas Prices Recommended by Kelkar Committee

Government-appointed Kelkar Committee has advocated moving to market determined pricing with rates being fixed at the highest possible level.

In a consultation paper, the committee said a cost-plus model for fixing natural gas prices as proposed by a Parliamentary Committee and some downstream industry players, may incentivise operators to gold-plate cost.

Kelkar Committee was last year formed to suggest 'Roadmap for Reduction in Import Dependency in Hydrocarbon Sector by 2030'

The panel submitted the consultation paper to the Oil Ministry last month with an request for putting it up on the ministry website for stakeholders to comment. The ministry, however, is yet to web host it.

"The principle of intergenerational equity implies that the natural resources should be priced at the highest price possible in the market, i.e. based on market determined pricing.

This will ensure energy security for the country by encouraging domestic exploration and production activities, efficient use of the resource and reduction in import burden," it said.

On the argument that a high price of natural gas may be economically unviable or unsustainable for sectors like fertilizer and power, the panel said, "it will be unfair to supply natural gas at artificially low prices to all consumers, including those who can afford to pay a higher price in order to support the priority sector."

The priority sectors may be supported by the government, which will get more taxes, royalty and profit petroleum from higher gas price, by way of transparent and targeted subsidies.

"Transition to market-determined producer prices of gas is essential to facilitate development of a gas market in the country by increasing the supply of domestic natural gas," it said, adding that market-determined price would give higher incentive for E&P activity given a more balanced risk-reward equation for producers.

At the end of transitory period to market determined pricing, producer prices for natural gas should be "unfettered of any government intervention, allowing for gas pricing by producers on a market-determined basis through transparent arm's length transactions," it said.

A four-member panel of secretaries from different ministries is currently holding consultations with stakeholders to work out a new gas pricing mechanism after the Rangarajan formula that doubled rates to $8.4 per million British thermal unit, was not acceptable to the NDA government.

The Kelkar panel said the "market-determined gas pricing should apply to all forms of gas irrespective of the source."