Sunday, March 23, 2014


RIL eyes extra gains from gas pricing

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Reliance Communications wants to make CDMA a data network, be dominant in the dongle business and migrate customers from the CDMA to GSM platform.


NEW DELHI: An innocuous fault line in the Rangarajan formula for pricing gas from domestic fields could end up giving windfall gains to producers, including Reliance Industries, which is already in the eye of a political storm over the proposed price increase from April 1.

The Mukesh Ambani-led company has already moved to take advantage by changing the terms of its fresh supply contracts with fertilizer plants that would entail them paying 10% over and above the new price. The entire gas from RIL's field is supplied to urea plants and its existing contracts expire on March 31.

The fly in the ointment is the way calorific, or heating, value of gas is calculated and the Rangarajan formula's silence on this aspect. The formula itself is based on average prices in global gas trading hubs. All these markets price gas at the fuel's gross calorific value (GCV), which is higher than the net calorific value (NCV), as impurities such as water or other gaseous content add to the volume.
NCV, on the other hand, is the usable heat that a consumer gets by burning one unit of gas after filtering the impurities. So far, all domestic gas, including from RIL's field, has been priced in terms of NCV.

The difference between the two is about 10% - one GCV equals 0.9 NCV. That means at any given price, a consumer would end up paying 10% more for one unit of gas if it is priced in terms of GCV than if its cost was to be calculated at NCV.

Reliance appears to be trying to take advantage of the Rangarajan formula's silence on this aspect. As per the formula, the price of gas is expected to double to $8.3 per unit from April as per existing method of basing it on GCV. But going by RIL's contract, the same price would come to $9.13 since it is based on NCV.

An RIL spokesperson declined to comment. But gas industry sources close to the company said the changeover to GCV was a global practice and in line with the Rangarajan formula. It would also apply to public sector producers as well.

"The big question is not how RIL is proposing to calculate the price but what price the government is going to notify, based on the Rangarajan formula. RIL or anybody else cannot charge more than that," one industry source said requesting anonymity.

But the fertilizer industry is not taking any chances. The fertilizer ministry has already taken up the issue with the oil ministry. The issue of implementing the June 27, 2013 decision on gas price revision is already pending with the Election Commission.

VIMAL SINGH
PGDM 1ST SEM 

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