Economic Highlights

New Delhi, 7 March 2014

Mounting Gas Price

GOVT LOSS, COMPANIES GAIN

By Shivaji Sarkar

The gas price issue is taking an interesting turn. The Government refuses to cancel the contract with Reliance pending arbitration. Minister for Petroleum Veerappa Moily remains firm on increasing the price to $8.4 per million BTU (MBTU). There are provisions for further price increase to $13.8 per MBTU. It is almost a continuous process of mounting losses on the nation. Reliance itself in the court has said that its production cost was $1.43 per MBTU.

Meanwhile, according to reports, Reliance has started drilling wells in D6 though so far it has yet to get environmental clearance. Apparently after years of dilly-dallying, the company has started its work despite issues remaining in arbitration. This has also drawn flak from the public sector ONGC. It has complained that Reliance has dug a well just 200 metres from its operational well in the Krishna-Godavari (KG) basin. In effect, the ONGC has virtually said that its gas would be robbed.

However, interestingly enough, ONGC has not said a word on the gas price hike. It wants to sail on about Rs 16,000 crore additional profits due to the increase. According to ONGC, its production cost is around $ 3.6 per MBTU.

The price hike is ominous because it would increase subsequently transportation, fertilizer production and many other costs. The impact would be an overall inflation and unnecessary heating up of the economy particularly at a time when the industry is grappling with the high costs and fall in demand in the market. It would not be easy for the new government either to roll the prices back or contain inflation.

The Power and Fertilizer Ministries have already expressed concern over the hike in gas prices and their adverse impact on power tariffs and fertilizer costs. This would increase outflow of in terms of subsidies for the power and fertilizer by Rs 400,000 crore. It would immediately double LPG cost of cylinders and increase the risk to 28,000 mw of installed capacity of gas-based plants. The Reliance profits simultaneously increase by Rs 75,000 to Rs 100,000 crore.

Questions have been raised as to why the price of petroleum products produced in the country and used for domestic purposes is being pegged at international level, for it having a severe impact on the economy. Regrettably, it appears that the policy orientation is not pegged towards benefitting the nation but is limited to the profits of some companies. This needs to change so that the entire economy could benefit from domestic production and help costs and subsequent market prices remain at a low level.

Former Principal Adviser (Power & Energy) Surya Sethi has pointed out in his article in The Hindu that nowhere in the world is the price of well-head gas linked to the price of liquefied natural gas. He has also highlighted that the spot price in the Henry Hub Terminal today is $3.77 per MBTU which is also higher than the well-head price of gas in the US. In Gulf countries, the price of gas is only $1 per MBTU, in Egypt $2.57, in Nigeria $0.11, in Australia $5 and in Indonesia around $1.

Recall that in July 2013, the gas price hike was protested by BJP leader Yashwant Sinha. As chairman of the Standing Committee on Finance, Sinha had suggested a rethink on Prime Minister’s advisor C Rangarajan committee formula that had advocated the hike. Sinha did not find any substance in the Rangarajan recommendation for fixing domestically-produced natural gas price at an average of international hub prices and cost of imported LNG instead of the present mechanism of market discovery. The committee considered it a default and not a failure. And according to Moily, there is no punishment for default except cancellation of the contract.

CPI MP Gurudas Dasgupta has stated that the Moily formula was for continuous rise and the price of $8.4 is not the final price as RIL had demanded a price of $13.8 MBTU in due course. He too says it is solely to benefit the private company and increase Government’s subsidy burden by Rs 76,000 crore for importing it.

In fact, the story of the high price of Reliance gas -- $4.2 per MBTU – had begun way back in 2007, when it was sent by the Empowered Group of Ministers (EGOM) headed by Pranab Mukherjee.

Reliance itself admitted in the court case between it and NTPC/Anil Ambani Group that its production cost was $1.43 per MBTU. Reliance Industries Ltd. (RIL) had initially agreed to supply gas at $2.34 to both NTPC and the Anil Ambani Group, which it subsequently reneged once the EGOM set the price at $4.2. It might be noted that by its own calculations, RIL would have made profits of 50 per cent if it had supplied gas at $2.34.

The Oil Ministry and RIL have locked horns over the reasons for a sharp decline in gas output from KG-D6 block for last three years, virtually since 2009. Output from D1 and D3 gas fields in the block fell sharply after achieving about 62 million metric standard cubic meters per day about three years ago. The fields are currently producing less than 10 mmscmd gas, which is far below the peak output of 80 mmscmd.

Moily’s predecessor S Jaipal Reddy had in May 2012 slapped a penalty of $1.005 billion on RIL for lagging behind in gas productions. He had commented that the company by not producing the gas was virtually hoarding it. The RIL disputed the penalty and arbitration was initiated. However, no similar notice seeking fines has been issued for 2012-2013 — even though Reliance has admitted that its gas production will reach only 1.847 trillion cubic feet, against a target of 2.957 trillion cubic feet.

The Comptroller and Auditor General in its report has said that RIL had breached some terms of production sharing (PSC) contract with the Government for more lucrative blocks and blamed the Petroleum Ministry for its failure. The CAG also stated that the current PSC encouraged companies to reduce the share of Government in the profits by skewing expenditure bill.

The entire process calls for vetting of executive proposals before a decision is taken. The loss to the nation is not limited to this case. There are many others, almost in all departments that have turned into scams because of bureaucratic adamancy and the lack of a final vetting process. The country hopes the new government would put this in place. ---INFA

(Copyright, India News and Feature Alliance)