New Delhi: Responding to Aam Aadmi Party leader Arvind Kejriwal questioning the UPA’s fuel pricing policy, Petroleum and Natural Gas Minister M. Veerappa Moily has said in a letter to Prime Minister Manmohan Singh that ONGC’s average cost of natural gas production was $3.6 per mmBtu during 2012-13, and its newer finds in deep sea cost more than the current rate of $4.2.

He has said the public sector firms ONGC and Oil India Ltd (OIL) account for about 80 per cent of India’ s gas production and will be the major beneficiary of gas rates going up from $4.2 mmBtu to $8.

“In choosing the basis for fixing the price, it is tempting to think that by choosing a lower price we are assuring consumers [of] the same amount of gas supply at a lower price. The fact is that the price formula affects the investment that will be made in exploration and production and therefore the total volume of gas likely to be produced,” Mr. Moily has written in his 13-page letter.

Keeping domestic rates artificially low will create a “perverse” incentive for these companies, reduce domestic gas exploration and production and encourage increased import of LNG at higher prices, he has said. “This in turn would worsen the fiscal deficit and the current account deficit and undermine the energy security of the country. The Indian economy can ill-afford such an outcome at this juncture.”

Mr. Moily has explained the process, the contractual requirement and the steps followed for raising the natural gas prices from April 1, 2014. On gas production from the RIL’s KG-D6 gas fields lagging targets since 2010-11, he has highlighted the process initiated by his predecessor S. Jaipal Reddy for penalising the firm by disallowing a portion of the cost incurred.

While the contract provides for termination in case of default by a contractor, Mr. Reddy in May 2012 slapped a penalty of $1.005 billion on the RIL. The company disputed the penalty and initiated arbitration.