Events & Issues

New Delhi, 7 April 2014

Gas Pricing Feud

POWER PLANTS TOO WARY

By Dhurjati Mukherjee

The AAP-BJP feud over gas pricing issue may well be aimed at the voters, but power plant companies would be giving it a serious thought.  Any increase in gas prices would have a disastrous effect on gas-fired power plants which would be unaffordable for State distribution companies. Already many such companies are finding the power tariff of Rs 4 to Rs 4.50 per unit quite costly.

Once the new gas pricing regime kicks up, there would be no takers left as power tariff would rise to over Rs 7 per unit, is what the Central Electricity Authority (CEA) is reported to have said in response to the Oil Ministry’s notification on gas pricing policy.  

However, fortunately, for the time being, the Election Commission has directed the Petroleum Ministry to put off plans to introduce the new gas pricing policy from this month, till after the general Elections, following Aam Admi Party chief, Arvind Kejriwal’s plea not to allow implementation of a proposed double hike (from $ 4.2 per million British thermal units to around $ 8.4 per mBtu) till a new Government is in place, as it violates the model code.

The recent developments regarding gas pricing have generated much controversy following an FIR filed at the behest of Kejriwal against the Petroleum Minister M Veerappa Moily and also against Reliance Industries chief Mukesh Ambani. Another complaint of eminent citizens, some of whom are part of NGO Common Cause was filed two months ago after CPI MP, Gurudas Dasgupta, and former Power Secretary EAS Sharma, moved the Supreme Court against RIL and Moily accusing them of manipulating gas price hike to bestow windfall gains to RIL-Niko. There are very few precedents were an FIR has been filed against a Cabinet minister by an ex chief minister.

The FIR stated that Reliance continued to receive unfair benefits with the second price hike recommended by the Rangarajan committee, set up to come up with a gas pricing formula. There has been severe criticism of the hike and Surya Sethi, a well-known expert who was principal advisor to power and energy, found that the present formula made no sense whatsoever. He observed: “The reason why it makes no sense is because ostensibly there is no market for natural gas in the world . . . the market is fully fudgible and there is no such market anywhere in the world other than North America. And the price of North American gas is under $ 4 while here it has been priced over $ 8”. 

Even eminent civil servants such as TSR Subramaniam and EAS Sharma accused the company of artificially jacking up exploration costs in the KG basin to benefit from higher cost recovery. They also pointed fingers of deliberately reducing gas production in the past few years on “bogus technical grounds”, the real motive being to conserve gas till prices increase from April, 2014.

A significant allegation in the FIR was whether Reliance has deliberately been escalating costs. In 2004 when Mani Shankar Aiyar was the oil minister, the ministry approved RIL’s plan to develop KG-D6 at $ 2-39 billion to produce 40 mmscmd gas. Just two years later in 2006, with Murli Deora in the saddle, the ministry approved an amended plan by Reliance that it needs to spend four times that amount that is, $8.8 billion to produce only double 80 mmscmd of gas. But it is also a fact that former oil minister, Jaipal Reddy, had not accepted the Reliance demand to double the price and insisted on a full account of the company’s inability to deliver the contracted supply of gas.

Experts in the field have reason to believe that Reliance has a motive to pad up its expenses because, as per the contract, the company first needs to recover its costs before sharing profits with the Government. Thus, its claim of massive rise in oil prices during these years which, in turn, pushed up the cost of drilling operations (including equipment) by 540 per cent has no basis as it has been trying to show higher costs to delay sharing profits, the FIR contended.

Meanwhile a 13-page letter of Moily stated that ONGC’s average cost of producing natural gas was about $3.6 per million British thermal unit in 2012-13 and its newer finds in deep sea cost more than the current rate of $4.2. Explaining the reasons behind raising natural gas prices to $8.4 from April, the Minister stated in the letter that several gas fields of RIL and State-owned ONGC were economically unviable and produce at the current rate of $4.2 per million British thermal unit. It spoke of the need for massive investment and technology induction required in the upstream oil and gas exploration and production to ensure uninterrupted production of gas.

The letter also did not give any consideration to the CAG report on a special audit of RIL books for 2006-08, when most major equipment and services were contracted, which accused the company of artificially jacking up the cost of bringing the field into production. The report, presented in Parliament, way back in September 2011, stated there could be a loss to the exchequer but couldn’t quantify it. 

The Petroleum Ministry, sadly did not take into account the repercussions doubling of gas price would have on gas-fired power plants. Apparently, if power tariffs are not revised in tune with the gas price, the plants may have to be switched off. It so happens that gas-fired plants make up about a quarter of the installed generation capacity in the country. Further, most of these are presently running at around 30 per cent of capacity due to paucity of domestic gas and lack of electricity buyers.

At current gas price, power plants finally pay around $5.6 to $6.5 per unit adding VAT and transportation charges. This may rise to $10 with the new price regime coming into force. And this would greatly affect the viability of the country’s power plants and a sizeable section of consumers in all parts of the country. A certain section which has been advocating the necessity of price increase has obviously not gone into the economics of the whole issue and what could be the buying and selling price of gas for these gas-fired power plants.

In such a situation, there is an immediate need for an independent probe by recognized technical experts, devoid of any political colour. Already experts have opined that the Indian market is not mature enough to throw up a gas price and so there cannot be any market determined price at such a juncture. Taking the crisis in the power sector into consideration, it is expected that whoever will be the nation’s new Prime Minister would need to exert authority and constitute another committee before deciding on enhancement of gas price. It goes without saying there’s a lot at stake. ---INFA     

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