Call it what you may, consultations, committees or simply political conspiracies, the government is now back to fixing gas prices, something it had done away with in 2003, when it permitted Reliance Industries (RIL) to bid out its gas on the basis of a formula approved by the government. The idea was to introduce a market determined regime for natural gas from the controlled regime where the government determined gas prices based on a 16% return to natural gas manufacturers like ONGC and OIL.
Fast forward ten years to 2013-
Plans are afoot to cap domestic cap natural gas prices below $7 per million metric British Thermal Unit (mmbtu) the unit to measure gas, up from the current benchmark price of $4.2 a unit. Discussions to revise gas pricing began in early January but the narrative around it remains largely unclear even after multiple rounds of consultations that has thrown up at least three new formulae to compute natural gas prices in the country. While the formulae differs in both content and application, it has established one ground rule- The government, owner of all natural resources as established by the supreme court, is back in the saddle to fix the price of natural gas in the country.
The three formulae for natural gas pricing which will be decided shortly (being touted as a revival step by the government) have sought to fix India’s gas price in relation to what prevails in different markets from the US, Japan to Qatar. Unfortunately, the rationale for indexing domestic gas prices to external markets is not very clear. While the Rangarajan authored report takes an average of US index Henry hub, UK index and the net back LNG prices in Japan, the finance ministry has opted to look for gas markets in the region like Oman, Qatar, Malaysia among others. The petroleum ministry has accepted the Rangarajan formula with a small tweak in periodicity to keep gas prices within $6.5 to $7 per mmbtu.
The government is looking at a twin objective while fixing the gas price, both of which would be better dealt with if left to the market. For one, the government wants to ensure returns for the investors in the oil and gas sector. The second is to keep prices under check for consumers in the power and fertilizer sector, basically the vote bank of the government.
Industry experts say that a $7 per Mmbtu may work for a company like RIL which has already sunk its investments and may make its moolah given the volume it will play with but that may not be the same for smaller fields. ONGC, for instance, may not be able to do much of discovery and development in the difficult terrains of deep water blocks with a price below $ 7 a unit. Fertiliser and Power, the prime consumers for the gas, have to move towards market prices if the economy has to bring back fiscal discipline. The sooner they do, the better.
The journey in the last ten years under four petroleum ministers in the UPA is a painstaking tale of how policies have been misinterpreted and nuances manipulated to suit the political agenda. The four incumbents over the last decade from Mani Shankar Aiyar, a left of the centre ideologue to Murli Deora, a one time active member of the Indo US parliamentary forum, Jaipal Reddy the socialist to the latest incumbent V Moily have successfully taken the petroleum sector back by at least 15 years. While policies made in 1996 stood for higher private participation and play of market forces, law makers today are working overtime to reverse the direction and enable higher government control with a diminishing role for market play.
India, is heavily import dependent when it comes to meeting its energy needs. While crude oil imports have gone up and are likely to increase over the years, gas imports too are expected to be on the rise. Worse, India is now importing coal as well, even though it sits of huge reserves as mining companies lag behind in production.
