In the last few months, crude oil prices have started to resemble some ride in an amusement park. This has brought the commodity publicity in the form of front-page coverage in top dailies. Readers are now familiar with the oil industry jargon; oil pool (OPA), administered pricing (APM) etc. But not many have heard of oil pool's lesser-known sibling, gas pool.
Till 1986, the Government permitted the producers to determine the price of natural gas. This was based on the thermal equivalence of substitute fuels.
However, from 1986 onwards the Government decided to fix a uniform price for natural gas on a yearly basis. It was only in 1995 that a committee was appointed to review the gas pricing mechanism (GPM) and based on their recommendations the Government introduced several changes.
In October 1997 the pricing policy shifted from a fixed price regime to a more market driven mechanism. Under the new mechanism, domestic gas prices were linked to a basket of international fuel oil prices. Also, this pricing mechanism was based on thermal content (international practice) of the gas as compared to the volumetric formula under the fixed price regime.
To ensure a smooth transition to a complete market driven mechanism (MDM) the Government adopted the policy of gradually linking domestic prices to international prices.
Gas price = Consumer price + Transmission charges + Royalty + Sales tax
Consumer price (based calorific value) = Basket of international fuel oil price * respective linkage rate * foreign exchange rate
Transmission charges are to be paid to Gas Authority (GAIL) at the rate of Rs 1,150/tscm (thousand standard cubic meters). Charges are linked to the calorific value of gas.
Royalty is to be paid to the gas producer, Oil & Natural Gas Corp (ONGC), at the rate of 10% of producer price. Sales tax of approximately 4% is to be levied.
GAIL charges gas price to the consumers and has to allocate a flat amount of Rs 2.5 bn to the gas pool. This money is primarily used to subsidise gas prices in the North East for promoting commercial and industrial activity in the region.
The current pricing policy was valid till March '00 and since no new policy has been enunciated the existing arrangement continues. It is expected that the new policy will increase the linkage rates to 85% and 95% in the next two years respectively.
From FY03 the APM in the petroleum sector is expected to be dismantled, one can expect a similar fate for the GPM.