Hairsplitting over PSC provisions-I: RIL rejects auditor's right to raise exceptions

May 22: In a fresh twist to the controversies surrounding audit of RIL`s E&P blocks, the company has challenged the legality of audit exceptions" raised by the government appointed auditor, Kunal and Associates, claiming that the auditor had no right to raise some of these exceptions under provisions of the PSC.
 8 The company has argued that the auditor has raised exceptions based on inspection of records maintained by the company and not on the basis of accounting procedures laid down in the PSC.
 8It has said that while the auditor, as the government`s representative is entitled to inspect records under Article 26.9 of the PSC, the government is not entitled to raise audit exceptions outside the process prescribed in Section 1.9 of the Accounting Procedure.
 8RIL has contended that the PSC does not provide for audit exceptions to be raised following an inspection of the records kept by the operator under Article 26.9.
 8The company has wished to draw a line between government`s powers to inspect records and its authority to raise exceptions which is outside the purvey of the accounting procedures. It has contended that the government`s right to inspect records under Article 26.9 is different from its right to conduct an audit under Section 1.9 of the Accounting Procedure and subsequently raise audit exceptions in accordance with Section 1.9.4 of the Accounting Procedure.
 8In view of these arguments, RIL believes that the exceptions raised by the auditor are unfair and improper.
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Hairsplitting over PSC provisions-II: Company distinguishes between right to inspect records and raise exceptions

May 22:  RIL seems to have made a distinction between the government's right to inspect records and the right to raise exceptions.
 8Article 26.9 of the PSC allows the government or its nominee to inspect all assets, books, records, reports, accounts, contracts, samples and data kept by the Contractor or the Operator in respect of Petroleum Operations in the Contract Area, provided, however, that the Contractor shall not be required to disclose any proprietary technology."
 8On the other hand, Article 1.9 of the Accounting Procedure of the PSC says, the government, "shall have the right to inspect and audit, during normal business hours, all records and documents supporting costs, expenditures, expenses, and income, such as the Contractor's accounts, books, records, invoices, cash vouchers, debit notes, price lists or similar documentation with respect to the Petroleum Operations conducted hereunder in each Year, within three (3) years (or such longer period as may be required in exceptional circumstances) from the end of such Year."
 8What is more, under Article 1.9, "Any audit exceptions shall be made by the Government in writing and notified to the Contractor within one hundred and twenty (120) days following completion of the audit in question".
 8So what RIL is trying to say is that under Article 26.9, the government is entitled to inspect all data but not raise any exceptions.
 8But under Article 1.9 of the Accounting Procedure, it has a right to inspect only "contractor's accounts, books, records, invoices, cash vouchers, debit notes, price lists or similar documentation" only.
 8So in one sense, what can be inspected under Article 1.9 is a subset of Article 26.9.
 8So if an item not covered under Article 1.9 is inspected under Article 26.9, the auditor does not have the right to raise an audit exception.
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Hairsplitting over PSC provisions-III: A lot at stake

May 22:  RIL is perhaps right on hair splitting on the various provisions of the PSC when it comes to government audits. After all, it has suffered from scathing indictments made by the CAG in the past.
 8But in doing so, the company is also trying to set a precedent.
 8One the rule is established for RIL, it has to be followed for all other PSCs and that will severely limit the scope of government audit of E&P blocks in the country.
 8The basic principle is that the government has a right to audit all books and records of a company because the government has a take on the profit generated from petroleum operations.
 8This is an inalienable right and cannot be denied to the government.
 8Provisions of the PSC may be worded differently but the letter and spirit of the provisions -- that the government has the right to inspects all petroleum related information of an operator -- must be respected by all parties.
 8Even so, RIL cannot be denied to right to put its own point of view forward.
 8Eventually, however, it looks like the battle can be settled through arbitration or through the courts.
 8There are many provisions in the PSC which require clarification as more and more E&P blocks move from exploration to production.
 8Since RIL is the first mover here, the responsibility falls on it to get these finer points clarified.   Details

Hairsplitting over PSC provisions-IV: Rolls the ball back to DGH on Parent Company Charges

May 22: Even as it raises bigger questions on the boundaries of government audit, RIL is also fighting the government`s decision to disallow Parent Company Charges (PCC) while computing cost recovery. It has said that the decision to put Corporate Office Support (COS) expenses was based on an advice given by none other than the DGH itself.
 8The company has said that being a diversified business conglomerate, it has consistently followed the practice of charging a fair share of COS expenses to its E&P division .
 8It has argued that COS costs allocated to the E&P division fall within Section 2.6 of the Accounting Procedure to the PSC, either as office and general administrative expenditures under Section 2.6.1 or as parent company overheads under Section 2.6.2.
 8As per the advice of DGH, RIL said that it began to allocate such COS costs as parent company overheads under Section 2.6.2 of the Accounting Procedure. Accordingly, RIL started to allocate COS costs as Parent Company Charges (PCC).
 8RIL claimed that the DGH subsequently revised its position and so the RIL re-allocated such amounts as COS costs under Section 2.6.1 of the Accounting Procedure.
 8Whatever be the provisions, RIL believes that these PCC expenses must be allowed in the cost recovery matrix. Whether or not the government buys that argument remains to be seen.
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Hairsplitting over PSC provisions-V: A background of the dispute over Parent Company Charges

May 22: Earlier the petroleum ministry had endorsed the Management Committee's decision to disallow Parent Company Charges (PCC) while computing cost recovery for the year 2007-08.
 8RIL had incorporated PCCs of $1.15 million in the cost recovery account, even though it had been disallowed by the Management Committee of the block while approving the budget.
 8The operator had argued that PCC amount being disputed by the Management Committee while approving the Audited Accounts for 2007-08 cannot be treated as disallowed cost in the Audited Accounts of the year 2007-08 itself.
 8RIL also claimed that the Cost Recovery of PCC is being separately handled by DGH and is still pending a decision.
 8The petroleum ministry had then refused to entertain such pleas and said that on the issue of reclassification of PCO to Company Overhead Charges (COS), the views of Ministry of Corporate Affairs (MCA) have been communicated to DGH for necessary action.
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Hairsplitting over PSC provisions-VI: Company seeks six months phase-I extension for completion of MWP commitments citing geophysical challenges

May 22: Even as RIL stands at loggerheads with the government over interpretation of the provisions of the PSC, it continues to conduct routine business with it. The understanding seems to be that while differences can persist, regular work must go on. Whether the government subscribes to the same sentiment however remains to be seen.
 8In a recent intimation to the petroleum ministry, RIL has sought a six-month extension for completion of phase-I of the Minimum Work Progamme (MWP) commitments in the block KG-DWN-2003/1 located in the KG basin. The company has said that complex geophysical challenges has delayed work in the block.
 8The extension will be in line with Article 3.6 of the Production Sharing Contract (PSC) whereby an initial six month extension can be granted for achievement of the MWP targets. If approved, RIL would get an extended timeline of up to December 2013 to finish the stipulated work in the block.
 8RIL has claimed that various constraints has led to the delay in completing the MWP provisions. Among the major ones are:
 --Time consuming efforts were made to understand Mesozoic Potential of the Krishna basin on a regional scale with ONGC to de-risk the identified drilling leads in this play
 --The block is infested with immense thrusting and needed better processing algorithms for image improvement.
 --The decision to award the processing job on nomination basis was pending with the MC for more than a year and considerable time was lost on account of this.
 --Sub-thrust play in Mesozoic is geologically complex and its overpressure regime is posing challenges in well engineering design and needs more time to incorporate right safely measures.
 8The request has been examined and subsequently approved by the operating committee of the block. Subsequently, it has been forwarded to the Management Committee (MC) of the block for its stamp of approval.
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Hairsplitting over PSC provisions-VII: Updated details of the block

May 22: The block KG-DWN-2003/1, awarded under NELP-III, is currently under Exploration Phase-I of exploration and is operated by RIL with other JV partners being BP Exploration (Alpha) Ltd (BPEAL) and  Hardy Exploration & Production (India) Inc ( HEPI) holding a participating interest of 30% and 10% respectively. The Exploration Phase-I is valid up to May 2013.
 8The company has reprocessed about 1100 LKM  and 450 SKM of seismic data against a commitment of 1020 LKM. It has also conduced 3D API of 3,232 SKM against a commitment of 2,100 SKM.
 8But the progress lags behind as far as drilling of exploratory wells is concerned. According to the latest updatesRIL has drilled only 4 exploratory wells against an MWP commitment of 6. For drilling the balance two wells, it has sought an extension of six months.
 8Notably, the RIL led consortium has struck four consecutive gas discoveries -- KGV-D3-A1, B1, R1 and W1 exploration wells -- in the block.
 8 As per the PSC of the block, the exploration license encompasses an area of 3,288 SKM, in water depths of 400 m to 2,200 m, and is located approximately 45 km offshore.
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RIL owned NEC-DWN-2002/1 block-I: Red tape delays relinquishment of block

May 22: The approval of relinquishment of RIL owned NEC-DWN-2002/1 block has been delayed for over a year due to miscommunication between the ministry and the DGH
8The block NEC-DWN-2002/1 was awarded to Reliance India Ltd and Hardy exploration under the NELP-IV round of bidding. The PSC was signed in February 2004 and the PEL was given for the period March 2004 to March 2012.
8However, after the completion of the first phase of exploration, RIL proposed to relinquish the block stating poor geological chances of perceiving success for hydrocarbon accumulation.
8The petroleum ministry wrote to the DGH in June and July of 2012 seeking comments from DGH on the relinquishment of the block and intimation if there was any financial implications due to relinquishment after completion of Phase 1 of the minimum work program
8The DGH replied to the ministry's request in August 2012, stating that there was no financial implication regarding the relinquishment of the block and that the proposal of the operator may be agreed to.
8The letter from the DGH never reached the competent authority at the petroleum ministry and was buried under a mountain of files at Shastri Bhawan.
8The petroleum ministry in a letter dated 13th May 2013, informed the DGH that the reply to their letters, sent in June and July of 2012, requesting DGH comments on the relinquishment of the block, had not been communicated to them.
8The DGH has sent a copy of their August 2012 letter to the ministry for their consideration. It remains to be seen if the letter will reach the competent authority this time and be acted upon. 
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RIL owned NEC-DWN-2002/1 block-II: DGH says no financial implication on relinquishment of the block

May 22: The DGH, after examining the exploration activities completed by RIL, felt that RIL had fulfilled its commitments under the minimum work programmme (MWP) and that their request for relinquishment may be agreed to.
8The block area awarded was 25565 sqkm. An area of 6391 sqkm was relinquished by RIL while entering into the third extension of phase-I. Water depth in the block ranged from 1800-2500m.
8The minimum work program stipulated a work commitment of 2100 LKM of 2D seismic survey, 1200 sqkm of 3D seismic survey and 1020 LKM of RP. The actual exploration done by RIL included 6516 LKM of 2D survey, 2872 sqkm of 3D survey and 1050 LKM of RP, which far exceeded the MWP commitments.
8Under phase-I of the MWP one exploration well was dug by RIL as per the MWP phase-I commitment. However, Phase-II and Phase-III of the MWP stipulated the digging of two exploration wells in both phases. Since the block was proposed for relinquishment after phase-I itself, these 4 exploration wells committed to in the work programme were never dug.
8RIL requested for 6 months extension of phase-I of the MWP thrice and these were granted by the relevant authorities.
8The DGH felt that based on the quarterly reports on the progress in MWP, that phase-I work commitments were completed by RIL.
8RIL at the behest of DGH, submitted a report titled "Final Interpretation Report on 2D Seismic data" in February 2010. The report was technically examined and found acceptable.
8RIL opted not to enter the second phase of the MWP after stating poor geological chances of hydrocarbon accumulation in the block.
8The DGH, after examining all the facts of the case, concluded that no financial implications arose from the relinquishment of the block by RIL and said that the proposal by the contactor to relinquish the block may be agreed to.
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Siti Energy requests APM gas for Moradabad-I: MoPNG's decision to deny APM gas to Siti based on misleading, incorrect and untruthful contentions

May 22: Siti Energy Limited, the CGD developer for Moradabad (UP) operating since 2006, has said that the contentions of the petroleum ministry based on which APM gas was denied to it were "misleading, incorrect and void of truth".
8The petroleum ministry had denied allocation of APM gas to Siti energy on the following grounds:
--APM gas is not available for allocation to Moradabad
--Siti had been in operation as a CGD even prior to the authorization from PNGRB through sourcing of RLNG.
--The ministry has no liability towards mandatory allocation of gas to any CGD entity which on its own account seeks authorization for marketing of gas and is not authorized by PNGRB
8Siti energy argued that the Supreme court, considering the environmental hazards due to automobile sector, had passed an order in April 2002, that the Union of India will give priority to transport sector including private vehicles all over India with regards to allocation of CNG.
8Siti said that ministry allocated APM gas to the transportation sector in April 2004 and said that supplies of commercial and industrial consumers would be made from LNG or gas available at commercial/market rates and not from CNG allocation. However APM gas is still being allocated to the commercial and industrial sectors.
8Siti said that it began development of CGD at Moradabad in 2006 and has since been requesting the petroleum ministry for allocation of APM gas of 0.05 MMSCMD
8Siti said that non-allocation of APM gas had forced them to continue business depending solely on RLNG supply available at market determined prices, which was approximately four times the price of APM gas.
8The company said that the business is not sustainable at these high prices for RLNG, but distribution of CNG and natural gas cannot be stopped to Moradabad consumers as it had become an essential commodity, the stoppage of which could lead to severe law and order problems.
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Siti Energy requests APM gas for Moradabad-II: Siti asks for 0.05 MMSCMD of APM gas allocation

May 22: Siti energy strongly disagreed with the petroleum ministry's decision to deny it access to APM gas. The company argued that the reasoning given by the ministry to deny it gas were misleading and incorrect.
8Siti said that APM gas is still used by the industrial and commercial customers, contrary to the ministry's own orders to not provide APM gas to these sectors.
8The company said that when they started development of CGD, PNGRB did not exist as a statutory body and argued that other entities that were allocated APM gas were never authorized by the PNGRB.
8Siti said that the ministry, as trustee of the country's natural resources, had the legal duty to protect and distribute its resources without any discrimination.
8Siti said that the Supreme court of India, in an order in April 2008, had directed the petroleum ministry to allocate APM gas to Haryana City gas distribution and Adani Energy.
8The company said that by not allocating APM gas, the citizens and consumers in Moradabad were being discriminated against as they were paying higher prices for CNG, while in adjoining areas such as Bareilly, Ghaziabad and Noida, CNG was available at lower rates. 
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Award on nomination basis: Cairn denied cost recovery in Raava PSC

May 22: Cairn India Limited (CIL) had requested approval of cost recovery of hire charges of Kakinada Jetty that was used ferrying materials for drilling of infill wells in the Ravva PSC in the year 2010-11 and 2011-12. The request was denied by the Management Committee (MC) as the contractor did not follow the PSC prescribed method of auction for hiring of the jetty.
8DGH stated that the contract was awarded on nomination basis to Kakinada sea port (KSPL) for a total cost of $5.7 million.
8The contract for a ware barge could not be awarded through a tendering process as there was no suitable barge meeting the company's shipping requirements, because of which the jetty was hired.
8The management committee did not agree for cost recovery for the hire of Kakinada jetty as the PSC procedure does not allow for the award of contract on nomination basis.
8The DGH stated that hiring of port facilities in place of ware barge was technologically acceptable, safe and more economical. Though the proposal was technologically acceptable and economical according to the DGH, it has not recommend cost recovery as the regulator felt that the management committee was the competent authority to approve any amendments to the procedures set out in the PSC
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Naphtha-NGL dispute between DGCEI and GAIL-I: Petroleum ministry comes out in support of GAIL

May 22: In yet another development in the ongoing dispute whereby the Directorate General of Central Excise Intelligence (DGCEI) has accused GAIL of misclassifying Natural Gas Liquid (NGL) as naphtha, the petroleum ministry has come out in support of the Maharatna PSU.
8Earlier the tax authority had alleged that owing to this misclassification, the exchequer was deprived of a substantial Rs.426 crore in excise duties between January 2008 and March 2012. Naphtha owing to its usage in manufacture of fertilizers and sensitive petroleum products was a non-taxable commodity while NGL was under the taxation regime until March 2012.
8The petroleum secretary, Vivek Rae after having examined the whole case thoroughly, has written to the finance ministry, saying that GAIL has done no wrong. He has seconded GAIL's contention there lacks a clear-cut definition of what is naphtha while the definition of NGL is very broad in nature, which has led to the confusion.
8In these circumstances, the petroleum ministry has said that GAIL's manufacture of naphtha has wrongly been classified as NGL.
8The petroleum secretary has also claimed that the specification of naphtha manufactured by GAIL is in line with  what is manufactured by other companies like IOC, BPCL and ONGC. Further it is also in conformity with the specification prescribed in the "Industrial Quality Control Manual (IQCM) for non-aviation fuels" and as defined under the Glossary of Petroleum Terms of Bureau of Indian Standards.
8Further strengthening GAIL's case, the report of Centre of High Technology (CHT) has also examined the characteristics of the product and concluded that the product is indeed naphtha as per industry norms.
8In light of these, Rae has requested the finance ministry to reexamine the case and consider an appropriate amendment to specify the definition of naphtha in the tariff orders, so that the confusion is allayed once and for all.
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Naphtha-NGL dispute between DGCEI and GAIL-II: Based on legal opinion, company claimed that it was indeed naphtha and not NGL

May 22: Stung by the allegations, GAIL had sought legal opinion to absolve itself of the charges by DGCEI, which was presented to the petroleum ministry for reference and necessary action on the issue.
8The legal opinion given by Lakshmikumaran & Sridharan goes to strengthen GAIL's assertion that the definition of 'Natural Gasoline Liquid" as per the supplementary note (b) to Chapter 27 of the First Schedule to the Central Excise Tariff Act, 1985 would not cause the product manufactured by GAIL to be considered and identified as Natural Gasoline instead of Naphtha in the Central Excise Tariff Act, 1985 as interpreted by DGCEI so long as the product manufactured by GAIL satisfies the parameters of naphtha as documented in various authoritative legal and technical texts.
8The excise department had alleged that GAIL has declared NGL, which is manufactured as a by-product in the course of manufacture of LPG from natural gas, as "naphtha" by misclassifying it under Central Excise Tariff provisions.
8GAIL has argued that NGL and naphtha are totally different products. GAIL said that definition of 'Naphtha' under the Naphtha (Acquisition, Sale, Storage and Prevention of use in Automobile) Order, 2000 carries great weight and is to be given primacy in defining and understanding the commodity 'Naphtha'.
8Furthermore, the definition of Naphtha given in the Glossary of Petroleum Terms of the Indian Standards Institute (ISI) is also of substantial importance in defining and understanding the commodity 'naphtha'.
8In other words, GAIL claims that it has indeed manufactured naphtha and not NGL.
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Naphtha-NGL dispute between DGCEI and GAIL-III: CHT vindicates GAIL's specifications of naphtha

May 22: To sort out the matters for once and for all, GAIL went on to detail the chemical characteristics of both Naphtha and Natural Gasoline Liquid (NGL) to prove its point that it was indeed producing naphtha and not NGL. The same specifications have also been seconded by the Central for High Technology (CHT), the technical arm of the petroleum ministry.
8The primary differentiating feature between the two products is that while NGL consists mainly of propanes and butanes, naphtha on the other hand, consists of higher hydrocarbons like pentanes, hexanes, heptanes and other carbon-hydrogen compounds (containing up to 12 carbon atoms).
8As per the legal opinion obtained by GAIL, naphtha is a liquid petroleum product which has the following characteristics :-
--The Initial Boiling Point (IBP) in the process of distillation would be around 30?C or above.
--At least 10% of the mixture would distil by or before 175C.
--At least 95 % of the mixture would distil by or before 190C to 240C.
--The Final Boiling Point (FBP) can be as high as 240C, i.e., the whole of the mixture would distil by or around 240C.
--Naphtha may be sub-classified into Light and Heavy; Light naphtha would have an EBP of approximately 30C and FBP of approximately 120C; Heavy naphtha would have an IBP of approximately 90C and FBP of approximately 200C.
--It is a complex mixture of hydrocarbons generally made up of about 5-12 carbon atoms
8Further GAIL said that Natural Gasoline is a liquid petroleum product with the following characteristics:-
--It is a volatile mixture of hydrocarbons in liquid state, much more volatile than commercial gasoline. In its wild state, it contains fairly high proportions of propane and butane. The removal of propane yields a more stable gasoline.
--It has butane, in varying proportions.
--The vapor pressure ranges from 10-34 psi.
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Petroleum ministry sets conservative natural gas production targets for 2013-14

May 22: As per the data available with the website, the projected figures for natural gas production for the annual plan of 2013-14 by the petroleum ministry is conservative at best.
 8Dwindling supplies from the KG-D6 and ageing nominated fields of ONGC and OIL reflect on the conservative targets set for this year. These factors has prevented the E&P companies to ameliorate substantially upon their last year's targets.
 8The total natural gas production during 2013-14 is expected to be 43.77 BCM, a petty improvement over last year's target of 43.02 BCM. Petinently, the target set is even lower than the 2011-12 actual production of 47.55 BCM.
 8Natural gas production by ONGC  during the year is expected to be 25.47 BCM which is slightly higher than the last year's target of 24.88 BCM.
 8OIL is expected to produce about 3.80 BCM of gas as compared to the 3.14 BCM target set for the year 2012-13.
 8Private companies and JVs are not expected to fare any better with projected natural gas production falling to 14.50 BCM for 2013-14 compared to 2012-13 target of 15 BCM.
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Rangarajan pricing formula-I: Gas price for April-June 2013 quarter pegged at $6.775/MMBTU

May 21: Computation of gas price for the quarter April-June 2013 using the Rangarajan Committee recommended formula pegs the price of gas at $6.775/MMBTU.
 8The gas price is obtained by a simple average of the weighted average netback price (P_IAV) for Indian imports and the weighted average of prices (P_WAV) prevailing at international hubs in US, UK and Japan.
 Computation of P_IAV
 8The weighted average netback price for Indian imports is obtained by averaging the netback imported prices of gas imported by Petronet LNG Ltd (PLL), GAIL and Gujarat State Petroleum Corp (GSPC) with appropriate weights over the last one year.
 8Over 80% of the gas imported into India was imported by PLL, most of which was sourced from Qatar, based on long term sourcing contracts. Hence, prices paid by PLL had the highest weightage while calculating the average imported netback price. PLL sourced gas at prices well below prices of gas sourced by GAIL and GSPC, which were mostly sourced from the spot market.
 8Netback price of gas sourced by PLL varied from a low of about $5.8/MMBTU to a high of $7.6/MMBTU over the year 2012.
 8Netback prices of gas sourced by GAIL and GSPC were higher, around $7/MMBTU to $11/MMBTU.
 8The weighted average netback prices of gas sourced by the three companies in the year 2012 increased consistently throughout the year. The weighted average price over the four quarters of the year per MMBTU were $6.33, $6.52, $6.84 and $7.34 respectively.
 8The P_IAV calculated based on data obtained by the three companies is $6.77/MMBTU.
 Computation of P_WAV
 8The world weighted average netback prices is calculated based on the prices and quantity of gas traded at the hubs or balancing points of major global markets. The major global hubs at US (Henry Hub), UK (NBP) and Japan were recommended by the Rangarajan committee for calculating world average netback price to producers.
 8The quantity of gas traded at Henry Hub and NBP were around 215 BCM and 275 BCM per quarter respectively. The quantity of gas traded in Japan was relatively smaller, around 30 BCM per quarter. Hence, while calculating world netback prices, US and UK gas prices have a much higher weightage in the calculation compared to Japan.
 8Over the last one year, there was a huge difference in the cost of gas traded at the various global hubs. While Henry hub prices were trading between $2.5-$3.5/MMBTU, the corresponding price at NBP (UK) varied from $8.5 to $10.8 per MMBTU. The prices prevailing in Japan were higher still over the last year, ranging from $11 to $13.5 per MMBTU.
 8Global gas prices were rising consistently over the last year. The weighted average global prices for the four quarters of the year 2012 were $6.43, $6.37, $6.68 and $7.64 respectively.
 8The P_WAV calculated from the data gives us a weighted average gas price of $6.78/MMBTU.
 8The simple average of P_IAV and P_WAV is calculated to determine the price for domestic gas according to the Rangarajan committee recommended formula. Hence, the price of gas based on the formula is calculated at $6.775/MMBTU.   Details

Rangarajan pricing formula-II: No one knows which way the wind will blow

May 21: The Cabinet Committee on Economic Affairs will face a hard time taking a decision on a single gas price because there are several of them now floating around.
 8Various arms of the government are yet to agree on a common methodology for calculating the price for domestic gas. While most of them agree with the fundamental concept for calculating gas prices as recommended by the Rangarajan committee, some of them would like to tinker with the formula.
 8Which of the formulas is the better one? That`s more a question of political and economic exigency than of economic logic.
 8Eventually, the CCEA is a political body and it is behind the scene politics that will decide which way the dice rolls.
 8Would the power, fertilizer lobbies carry the day? Will North Block`s views have precedence? Or would the Rangarajan Committee`s formula be sacrosant? These are questions only time will answer.
 8Given the Prime Minister`s penchant for wriggling out of tight situations, it is also possible that the entire issue will be referred to the Empowered Group of Ministers for a view.   Details

Rangarajan pricing formula-III: Details of full impact of new gas pricing on the fertilizer sector

May 21: The department of fertilizers (DOF) has said in its comments on the Rangarajan Committee recommended gas pricing formula, that an increase in the price of gas will have a huge financial impact on the fertilizer sector.
 8The DOF said that currently 21 gas based urea units consume almost 25 MMBTU of gas per MT of urea produced.
 8Increase of USD 1/MMBTU in the price of gas translates to enhanced cost of urea production by $24.89 per MT. For 18 MMT urea production per annum, the enhanced cost in $448 million per annum, i.e. Rs. 2465 crore per annum ( Rs 55 per USD)
 8Additional 5 MMT urea capacity is being converted from Naptha/FO/LSHS to gas during 2013-14. This will result in additional cost of Rs 690 crore per annum in 2013-14.
 8Overall impact of USD 1/MMBTU increase in gas price will be Rs 3155 crore per annum from 2013-14 onwards for 23 MMT of urea production.
 8New investment policy 2012 encourages 9 MMT additional urea capacity by end of 12th plan (2016-17). Every one USD/MMBTU increase in price of gas will enhance subsidy by USD 20 per MT, i.e. $180 million per annum ( Rs 990 crore per annum at Rs 55 per USD)
 8Overall impact of USD 1/MMBTU increase in gas price will therefore be Rs 4144 crore per annum for 32 MMT urea production from 2017-18 onwards.   Details

Rangarajan pricing formula-IV: Power sector to be hit most

May 21: There are 18000 MW of commissioned gas based power plants in India. 30% of this capacity is stranded for want of gas.
 8Around 1000 MW of gas based power plants at advanced stage of commissioning/construction are stranded for want of gas.
 8With the existing gas based capacity generating at 70% PLF, about 1,10,376 million units are generated per annum. A $1 increase in the gas price, assuming that the delivered price increases by $1.3/MMBTU, the impact on the power sector will be about Rs 6450 crores.
 8The base price of domestic gas at $8.8/MMBTU (Delivered price of $12/MMBTU) would mean that the total impact on existing gas based stations due to increase in base gas price from $4.2/MMBTU to $8.8/MMBTU (assuming increase in delivered gas price of about $6/MMBTU) is about Rs 29,800 crores per annum.
 8The variable cost would be around Rs 5.40/Kwhr (45 paise per MMBTU) taking the total cost of generation to around Rs 6.40/unit, which will be unviable.
 8Considering the capacity presently under construction, the total gas base capacity will be about 28,000 MW, generating about 1,71,696 MU/annum at 70% PLF. The impact of every dollar increase in the price of gas would be about Rs 10,400 crores per annum.
 8Thus, the impact on total gas based capacity on increase in base price from $4.2/MMBTU to $8.8/MMBTU will be about Rs 46,360 crores per annum. Hence, base price of gas beyond $5/MMBTU is unviable for the power sector under the prevailing retail rates for power.   Details

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