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The C Rangarajan Committee’s recommendation of indexing domestic gas price with international rates is well balanced , says RS Sharma, former chairman and managing director, ONGC.
The C Rangarajan Committee’s recommendation of indexing domestic gas price with international rates is well balanced but some suggestions are little complex and should be simplified further , says RS Sharma, former chairman and managing director, ONGC.
According to the formula, the base price of domestic natural gas would go up to USD 8.8 a million British thermal unit (mBtu) from the current USD 4.2 mBtu. Rangarajan formula, which uses the trailing 12-month average of the producer price of LNG imports to India and the price prevalent in the US, Europe and Japan.
Though the pricing formula many not have been fully accepted by power and fertiliser ministries as this would result in higher subsidy outgo, as the input costs for fertiliser and gas-based power plants will go up. Hence, consumers find it illogical to link domestic price with spot liquefied natural gas(LNG) contracts.
In an interview with CNBC-TV18, Sharma said that the new pricing formula should also have roadmap pertaining to the sector for next five years .
Below is the verbatim transcript of his interview to CNBC-TV18
Q: We do not know for sure whether there is opposition, but it seems likely that is the case. Do you think some negotiations will lead to a compromise formula or do you think this whole issue of a gas price hike will be stalled this year?
A: I have also notice various media reports to that effect. Personally when this Rangarajan Committee had come out with the recommendations, I had thought that they have done a very balanced job and I still maintain that. The gas pricing has been a highly contentious issue for many years. The producers want a more remunerative price and the consumer lobby, which is more politically sensitive have been able to impact the decisions that gas price is not to be raised.
So, right now based on all the background, the controversies the Rangarajan committee went quite detail into that issue the only concern I had when the said recommendations had come that the formulation which they had worked out seems to be quite complex to actually implement. I wish that could be simplified. I feel they have done a fairly balanced job. As of now let it be raised to that average of the various market. The weighted average price and five years later it should move to the gas market.
So that is based on the gas marketing mechanism. They did not spell out the roadmap how that should be done. Even now I personally feel the price that they have arrived at is quite reasonable from both consumers and the producer point of view. When the decision is taken they should see to it that we are inviting new players to come and operate in Indian Exploration and Production (E&P) sector.
So, they would expect a more representative market based pricing. Today we know that power plants are idling and spot cargoes getting imported at the price of USD 16-17 MMBTU. There have been buyers at that price as well. The worry is that in case there are not enough incentives for the producers to increase the activity, increase the production, we are going to be more and more dependent on the imports. We know that import prices in times to come are going to only increase.
I feel that consumers, the power, fertilizer have taken a view that why this quantum increase should be done. So, all these issues are there. However, I feel the decision makers should go by and take a decision on this recommendation that is done. Only two issues - they try to simplify the calculation methodology and also try to come out with a decision, a roadmap how in five years time that is going to be linked to the market determined prices.
Q: The two principal oppositions have come in from the Power Ministry and the Finance Ministry apparently with the Finance Ministry saying that including spot prices is unreasonable and the Power Ministry is saying USD 5/MMBTU is just a completely unviable price. Do you see any logic in these two points of resistance or opposition?
A: If you look from consumers’ perspective for power it is a pass-through. The issue is the consumer. I feel consumers have to reconcile that they cannot continue to have the cheaper feed stock or cheaper fuel available for all times to come when the country does not have enough production.
First and foremost need of the economy is that domestic production should be increased exponentially. There has to be more activity and reduce the import dependence in years to come. Looking to that larger objective I feel the decision makers should go about raising the price at least to the level that is recommended by this committee.
There has to be more awareness amongst the consumers, power sector, and fertilizer sector that is a fact of the matter. They have to accept this reality that is only way the economy will be able to grow. Otherwise we will keep having increased dependency on imports which is certainly not a good thing from economy’s point of view. The industry will not be able to grow unless the producers are able to get more representative, more market related prices.
ONGC stock price
On July 31, 2014, Oil and Natural Gas Corporation closed at Rs 395.35, down Rs 3.4, or 0.85 percent. The 52-week high of the share was Rs 472.00 and the 52-week low was Rs 234.40.
The company's trailing 12-month (TTM) EPS was at Rs 25.83 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 15.31. The latest book value of the company is Rs 171.29 per share. At current value, the price-to-book value of the company is 2.31.
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