Civil Service General Studies – India’s natural gas pricing policy – Curtains down, but doubts remain

June 29, 2013 at 1:13 pm | Posted in Uncategorized | Leave a comment
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Natural gas pricing in India – The imbroglio ends, but who pays

The cabinet has just cleared a two-fold increase in the price of natural gas as recommended by the Rangarajan Committee. India’s gas producers will now sell their gas at USD 8.4 per million metreic British Thermal Unit (mmBTU)

What are the other stipulation of the gas price kike proposal? ….. Gas prices will be revised every three months starting April 1 next year till fiscal 2017, after which they would be market-linked. The Rangrajan Committee had recommended review every one month.

Who gains? .. The following gas producers will gain. It will be an windfall profit for them.
a. Oil and Natural Gas Corporation Ltd (ONGC) – Public sector
b. Oil India Ltd –Public sector
c. Gujarat State Power Corporation Ltd – public sector under Gujarat government
b. Reliance Industries Ltd -Private sector led by Mukhesh Ambani
Reliance is the major producer of natural gases in the country and, so, lions share of the benefits will accrue to this company.

Who will lose? … Power generation companies and fertilizer producing companies will find their input cost soaring. They will pass on the cost to the consumers who will see the cost of electricity jumping from less than Rs. 3 per unit now to a little above Rs. 6 per unit.
The cost of fertilizers bought by farmers will go up sharply bringing additional load to the farmers already reeling under heavy input costs.

To soften the blow to the farmers and the small consumers of electric power, the central government is mulling over the idea of giving subsidies for fertilizers and electric power. But, such a step will be highly regressive as the subsidies, which are being phased out across the board to curtail government deficit, will return with a vengeance. The burden will be paid by the common citizen finally.

Why the government had to increase natural gas prices?

For the last few years, gas production in the country had stagnated or even declined because, Reliance Industries had reported unspecified technical problems in its gas extraction facilities in the Krishna Godavari Basin. Some people allege that Reliance wanted to arm-twist the government on its demand for higher gas prices by deliberately curtailing gas production in the KG Basin.
Alarmed by the uncertainty caused by the unsolved gas pricing issue, inflow of a lot of FDI in oil and gas sector got choked. It led to no new investment in this vital sector. The energy production scenario looked grim.

Consequently, new power generation companies depending on natural gas as their feed either remained shut or operated with low utilization of capacity. It had a direct bearing on the core power generation sector of India.

Similar situation was also faced by fertilizer companies, who had either to make do with costlier imported gas or remain idle. The country had to import fertilizers spending its precious forex reserves.

Thus, due to the intransigence (unproven, though) of one major gas producer, the country’s economy was getting hit in so many vulnerable areas.

The government of India had appointed a committee headed by Mr. Rangarajan, the previous governor of the Reserve Bank of India. It was asked to go into the merits of Reliance Industries demand for a seven-fold increase in gas prices, and suggest the steps the government of India could take to end the impasse.

The recent approval of the government to agree for a two-fold price rise was the culmination of this process.

The Rangarajan committee’s formula to decide the extent of price increase of natural gas was calculated using the weighted average rate (WAR) of three international hubs of natural gas – the Henry Hub (US), the PNB (UK) and the well-head price in Japan.

Who opposed the price hike and why? ..

The natural gas, as a resource, belongs to the nation. In principle, it should be used for the country’s good, not to unduly enhance the gain of the corporate houses simply because they have facilitated its exploration and extraction. Reasonable return on investment –yes. Exploitative pricing – no. Even the Supreme Court has clarified that the oil and gas fields belong to the nation.

The burden enhanced gas prices bring is frightening. According to the fertilizer pricing expert’s estimates, a $1 rise in natural gas prices would lead to an annual increase of a whopping Rs3,155 crore for fertiliser plants producing 23 million tonnes of urea. Clearly, such a load can neither be borne by the farmers, nor by the government. Cosmetic amelioration through subsidies will accentuate the pain.

Now, the moot question is why the Indian farmer will buy fertilizer produced with natural gas at international prices? Does he get the benefits his counterpart in developed countries get?

If at all an international reference is needed, why consider other gas hubs like the PNB (U.K) And those in Japan? Reference to Henry Hub would have sufficed.

Further, if international gas prices shoot up in future due to reasons like war, conflicts, sanctions etc., why will the Indian farmer be asked to take the hit through enhanced power and fertilizer costs?

The present formula stipulates no ceiling on the price of natural gas. This does not stand reason. Gas prices touching the heart and soul of the farmers and consumers must not be subjected to the vagaries of international commodity pricing. That will be disastrous.

The gas producers now operate with no government oversight or regulatory controls. This is one reason why the CAG still struggles to get unfettered access to the Reliance accounts books. This opacity must end. A regulator must be set up to oversee the operations of the gas producers.

Strident demands have been made by the Left parties to aggressively pursue cost recovery and penalty claims against Reliance. Till now, the company has succeeded in barricading itself against government’s insight into these areas. Vast sums of government revenue due from Reliance remain un-recovered. This happens when the government remains so starved for resources.

Reliance has under-recovered gas from the KG basin, citing technical reasons. After this price hike, the gas fields will become fecund again. In that case, the minimum the government must do is to ask Reliance to make up the past production loss first (at old rates of USD 4.2) before it claims the new enhanced gas prices.

The other recommendation of the Rangarajan Committee to shift to a ‘revenue-sharing arrangement’ in place of the preset buyer-seller arrangement must be enforced with vigour. Such a policy will preempt pricing disputes and the tendency of the companies to artificially and often fraudulently inflate their investment figures, known as ‘gold-plating’.

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