EGoM meet on natural gas allocation policy on Feb 24

In view of a sharp drop in output from RIL's eastern offshore KG-D6 block, an Empowered Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee is likely to meet today on February 24 to consider changes in the natural gas allocation policy. The panel, which is meeting for the first time in more than 18 months, is also likely to consider the Saumitra Chaudhuri report that has recommended reserving or preferential allotment of domestically produced natural gas only to fertiliser and power plants.

Issues that are expected to come up for discussion in the EGoM are the requirement of 13.22 mmcmd of gas for urea plant beyond 15.7 mmcmd, which has already been allocated from KG-D6, the requirement of 31.81 mmcmd gas for 14 power plants with a total capacity of 7,219.5 MW (that are to be commissioned in the Eleventh Five-Year Plan period ending March 31), the quantum of marketing margin charged by RIL on sale of KG-D6 and the Oil Ministry's decision to ask the Petroleum & Natural Gas Regulatory Board (PNGRB) to regulate the marketing margins. 

The power ministry’s proposal to ask RIL to sign an agreement to supply 2.16 mmcmd of gas to NTPC may also figure in the EGoM meeting. RIL had not signed the pact for supply of 2.74 mmcmd of gas out of the 4.46 mmcmd allocated to five power projects. Gas output from KG-D6 has fallen to about 35 million cubic meters per day after touching a peak of 60 mmcmd in March 2010, prompting the ministry to suggest changes in the allocation policy.

Further suggestions made by the oil ministry on fuel/gas allocations are also likely to be discussed by the Ministerial panel. The oil ministry has proposed to halt gas supplies to power producers that do not sell electricity at regulated tariffs. It has also recommended cancellation of gas allocation to those merchant power plants in Andhra Pradesh that currently sell electricity above the tariff determined by the regulator. The ministry has also proposed allocating gas to only urea fertiliser plants in the future. On the other hand, it has suggested stopping fuel supply to phosphates and potassium fertiliser producers.

The Association of Oil and Gas Operators (AOGO), whose members also includes BP plc of UK, Cairn, BG Group and BHP Billiton, has written to Pulok Chatterji, Principal Secretary to the Prime Minister, saying the recommendation contradicts the contractual commitments of the Government made in the Production Sharing Contracts (PSC) and New Exploration Licensing Policy (NELP)' for market discovery of price of gas. Once gas is reserved for certain sectors, they are not likely to quote optimal price for gas and instead would under price the scarce fuel. Pre-allocation of gas, AOGO said, 'distorts demand supply equation and eliminates the possibility of discovering free market price of gas.'

'Discovery of free market price of gas is a fundamental feature of PSC signed under NELP... there has been a huge escalation in costs for developing oil and gas fields over the last few years. An incorrectly specified domestic gas price will retard domestic gas development,' it added. Reliance Industries has also opposed pre-allocation of the scarce fuel saying it distorts demand-supply equation and eliminates possibility of discovering free market price of gas.