Oman Gas Price Hike: Cabinet To Decide On Arbitration In London

NEW DELHI: The Union Cabinet will soon take a call on the vexed issue of whether to go for international arbitration at a London tribunal against Oman, which raised natural gas price from 77 cents to $3 per unit, leading to a sharp rise in the price of fertiliser imported by India under a long-term off-take agreement.
The finance ministry has rejected a request for increasing the price of urea imported from Omifco, an equal joint venture of Indian and Oman firms, in line with the higher gas price implemented by the Arab nation at the beginning of this year.
Confident of victory in the dispute, North Block strongly favours taking the matter to the International Arbitration Tribunal in London, but other ministries including the chemicals and fertilisers ministry do not favour any such step, fearing disruption in the supply of the most commonly used plant nutrient in India.
“Since there is divergence of views on the matter, we have decided to take it to the Cabinet within a fortnight,” said a government official privy to the development.
According to Indian officials, Oman’s revision of the price of natural gas supplied to Omifco violates the agreement that mandates supply of gas at a fixed price till 2015. Omifco is a joint venture between Indian cooperatives Iffco and Kribhco owning 25% each and the Oman government’s Oman Oil Company, which owns 50%. India’s agreement with Oman allows it to purchase all the urea produced by Omifco for 15 years at predetermined prices.
The gas price revision warrants an increase in the import price of urea from $120 a tonne to $200 a tonne for the 2 million tonne supplied by Omifco every year.
The price revision was due only in July 2015.
The proposal for price revision of imported urea prepared by the fertiliser department was withdrawn on March 28 after the finance ministry refused to accept it saying it would push up India’s fertiliser subsidy by R500 crore. A revised proposal is being worked out.
The fertiliser department favours a price revision of imported urea in the light of higher gas price, since Omifco’s urea supplies even at higher price would still be cheaper than the urea sold in global markets at $400-450 per tonne.
“Besides, if Oman stops supplies for a year, we would be forced to import at higher prices, risking a significantly higher subsidy outgo,” said the person. India may also find it difficult to enforce any favourable decision from the arbitration tribunal on a sovereign government, with which the country has no comprehensive economic cooperation agreement, said the official.
An official told FE that Oman may agree to a slightly lower price of $2.5 per million metric British thermal unit (mmBtu) if India doesn’t go for arbitration. At $2.5 per mmBtu, the import price would work out to $160 a tonne, said the person.
The Oman government increased the price of gas from January 1, 2012, for all industries, including Omifco, which uses gas as feedstock to produce urea. However, Omifco has been permitted to make provisional payments at the old rates till March 31. The revised price was to be implemented from April 1.
The gas price revision follows a drop in the country’s oil and gas reserves estimate as well as public protests against giving cheap gas to Omifco while people faced higher power tariffs.
Flaring Up
*Oman has raised gas price from 77 cents to $3 from the beginning of 2012, which would raise urea import costs
* Finmin has rejected a request to correspondingly raise urea price, since it would boost fertiliser subsidy bill
* Officials say Oman’s move violates an agreement which mandates supply of gas at a fixed price till 2015
* The agreement allows India to buy all urea produced by Omifco for 15 years at predetermined prices