No more cheap gas: Oil Ministry

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'No more cheap gas,' says the Oil Ministry. That's not very good news for power companies. CNBC-TV18 reports that the new gas pricing policy could also mean the end of sweetheart deals like the one between Reliance Industries and Reliance Natural Resources Limited .

 

Gas is not for burning, that's the Oil Ministry's message to industry. A high-level committee constituted to lay down guidelines for pricing of natural gas has made it clear that market price for natural gas will prevail and the age of cheap gas is over. The sale price of gas will be linked to alternative fuel price- LNG or crude.

 

But this could mean celebrations for gas producers like ONGC and Reliance Industries. Currently, 90% of ONGC's gas is APM gas and is sold at USD 1.9 per mmbtu. The company could now end up getting double of that.

 

Moreover, the government will also fix a reference price for natural gas, which would be the floor price. Buyers would have to buy gas at that price if not higher. Sources say that it could be in the range of USD 4-4.5.

 

The new policy would also put an end to sweetheart deals. Competitive bidding and arms length pricing will now have to be observed in all gas contracts. Oil Ministry officials say that effectively, the Reliance Industries and the Reliance Natural Resources Limited's gas contract would now be made redundant.

 

The two will have to go through a bidding process which would essentially mean that RNRL would have to pay double of what it would have payed if the gas contract had been approved.

 

Competitive bidding hasn't quite found favour with most gas players. They say that the Indian gas market is highly under developed and that the economic price of gas can't be passed on to the end consumer.

 

Moreover, lack of pipeline infrastructure could also mean that only those industries which aren't regulated would be able to offer market prices and only in those areas where it is easily accessible.

 

The power sector will be the worst hit and Power Ministry is already talking tough. Sources say the ministry has asked power companies to dump gas in favour of coal based power plants.

 

But the Oil Ministry isn't too perturbed. It sees more than adequate demand for gas from the fertiliser and petrochemical sectors. Moreover, it says that gas, as fuel for the power sector has to be seen in relation to the fuel that it would replace which is naptha and not coal. The market price for naptha currently is double that of natural gas.