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
(Copyright,
India News and Feature Alliance)
|