Gas pricing policy to be reviewed, uncertainties removed: FM

Against the backdrop of oil firms like BP Plc complaining of artificially low gas rates in the country impeding investments, Finance Minister P Chidambaram Thursday said the pricing policy will be reviewed and uncertainties removed.

Last Updated: Feb 28, 2013, 23:04 PM IST

New Delhi: Against the backdrop of oil firms like BP Plc complaining of artificially low gas rates in the country impeding investments, Finance Minister P Chidambaram Thursday said the pricing policy will be reviewed and uncertainties removed.

Majority of the domestically produced natural gas is priced at USD 4.2 per million British thermal unit, one-third of the imported cost. Domestic and international firms have been saying that this cost is unremunerative for undertaking exploration in deeper and risky basins.

Chidambaram, presenting the Budget for 2013-14, said: "The natural gas pricing policy will be reviewed and uncertainties regarding pricing will be removed."

A government appointed committee headed by C Rangarajan has suggested pricing domestically produced gas at an average of international hub prices and stripped down cost of imported liquid gas (LNG).

Currently, this average comes to about USD 8-8.5 per mmBtu, half-way meeting expectations of companies of being allowed to charged a price equivalent to imported liquefied natural gas (LNG).

Oil Minister M Veerappa Moily has already accepted the recommendations and is moving Cabinet for a formal approval.

Chidambaram also said the oil and gas exploration policy will be reviewed to move from profit sharing to revenue sharing contracts.

The cost-recovery model of the New Exploration Licensing Policy (NELP), which allows operators to recover all their investment in successful as well as unsuccessful wells from sale of oil and gas before sharing profits with the government, had come in for strong criticism from official auditor CAG.

CAG felt the cost recovery model incentivises firms to keep raising investment to postpone government's profits.

To put an end to the controversy, the Rangarajan committee has suggested moving to a revenue sharing model where companies will have to bid upfront stating the part of the production they will share with the government from the very first day.

The Finance Minister also said NELP blocks that were awarded but are stalled for defence and other clearances will be cleared soon.

Commenting on the announcements, BP India Head Sashi Mukundan said: "We welcome the focus on regulatory and pricing clarity for the exploration and production industry announced in the budget today.

"A key next step should be the transition of prices of domestic natural gas to import parity in the next 3 years, similar to the diesel price reforms. To me, these measures will help build a sustainable gas market in the country."

Chidambaram also said a policy to encourage exploration and production of shale gas will be announced.

Essar Oil Managing Director & CEO L K Gupta said the reintroduction of investment allowance for investments in plant and machinery of over Rs 100 crore will encourage new investments.

"For the oil and gas sector, we are happy to see government re-emphasise the need for a natural gas pricing policy," he said, adding that the Finance Minister should remove service tax on service providers to E&P companies since that drains away a substantial part of the funds committed for exploration.

He said the industry was disappointed that Chidambaram has not removed the tax anomaly between branded and unbranded fuel, given that such fuel has been proved to increase engine efficiency and enhance its life, reducing consumption.

Ficci welcomed the announcement of moving from profit sharing to revenue sharing for E&P projects as this will do away the ambiguity in calculation of cost recovery and approval of capital expenditure.

Sanjay Grover, Partner - Tax & regulatory Services, Ernst & Young said the increase in the income tax surcharge for foreign and Indian companies, income tax rate on royalties and fees for technical services payable to foreign companies and increase in the personal tax rates will be negative for the industry as these steps will lead to increase in cost of operations and therefore indirectly lead to higher inflation.

KPMG Partner (Tax) Nabin Ballodia said the commitment of the government to introduce stability in natural gas pricing, encourage exploration and production of shale gas and clear stalled NELP blocks are some positive steps.

"Increase in withholding tax rate for royalty and fee for technical services as well as surcharge rates would increase overall cost for oil and gas companies. From an overall perspective, Budget 2013 has a negative bias for oil and gas industry," Ballodia said.

Deepak Mahurkar, Leader Oil and Gas, PwC India said, stops in the hydrocarbon sector are intended to be removed for energy securitisation by resolving E&P policy ambiguities, allowing economic value of gas to reflect in price of domestic production, unconventional hydrocarbon to be tapped and more LNG imports to be made reality.