The Hindu Business Line : CAG critical of ONGC subsidising GAIL's gas purchases

IN a bizarre case of cross-subsidisation of one public sector company by another, GAIL (India) purchased gas from Oil and Natural Gas Corporation Ltd (ONGC) at a lower price than the former pays to the joint venture companies (JVs) from which it purchases gas "with the higher cost of gas purchased from JVs amounting to Rs 3,477 crore up to March 2003 being adjusted from the price paid to ONGC."

This fleecing of ONGC by GAIL has been highlighted in the latest report of the Comptroller and Auditor General of India (CAG) in his `Reviews on some of the activities of selected PSUs'. CAG's observation assumes added importance in the light of the fact that both the public sector oil and gas companies have been lined up for disinvestment with IPO for ONGC having already begun and GAIL's likely in the coming months.

GAIL was incorporated on August 16, 1984 as a fully owned Central Government company with the remit to foster infrastructure for the transportation of natural gas available in oilfields both onshore and offshore. Along with the construction of pipelines to transport gas, GAIL has also set up plants for extraction of liquid hydrocarbons viz., liquefied petroleum gas (LPG), propane, pentane and subsequently GAIL went in for transportation of LPG and production of polymers.

GAIL currently purchases about 84 per cent of gas from ONGC and the balance from Oil India Ltd (OIL), the Ravva Joint Venture (JV), the Tapti JV and the Panna Mukta JV.

While the price payable to ONGC and OIL is governed by the Pricing Order (September 1997) of the Government, GAIL entered into Production Sharing Contracts (PSC) with the respective JVs for the price payable to them. GAIL finalised an agreement with Ravva JV while the agreement with the other two JVs had not been finalised, the CAG said in its report.

The CAG said the company disbursed higher prices for purchase of gas from JV companies than what it earned from the sale to the consumers. In order to be compensated for the higher cost of gas purchased from JV companies, GAIL was allowed to recover from the sale price, the difference between the consumer price and price paid to the JV companies and then pass on the balance amount to ONGC and OIL as producer price.

Since the consumer price had a maximum ceiling of Rs 2,850 per 1,000 SCM (square cubic metre) the increase in supply and price of gas from JVs was widening the gap between the purchase price and sale price, the CAG noted.

"Had timely revision been undertaken, extra burden on exchequer amounting to Rs 993 crore for the year 2002-03 could have been avoided. The total amount of higher price passed on to joint ventures amounted to Rs 3,477 crore for the period October 1997 to March 2003," the CAG said.

What is more, the deficit was ultimately passed on to gas producer public sector undertakings ONGC and OIL. The producer price of Rs 2,513 per 1,000 SCM, which ONGC was getting during the quarter ending December 1999, came down to Rs 2,088 per 1,000 SCM in a period of one year, i.e., in the quarter ending December 2000. It was Rs 2,138 per 1,000 SCM in December 2001 and Rs 2,132 per 1,000 SCM in March 2003. CAG observed that "this subsidy in meeting the higher cost of gas purchased from JVs was also not announced by the Government in the Union Budgets of respective years." GAIL management admitted that the loss on account of higher price paid for gas purchased from JVs was being passed on to the gas producer PSUs.

Highlighting this discriminatory and differential pricing approach by a public sector company, the CAG has urged the Ministry of Petroleum and Natural Gas to expedite its long-overdue decisions to introduce 100 per cent parity of the prices of natural gas with those of the international fuel oils to reduce the loss to the gas producer PSUs such as ONGC and OIL. The agreements with other JVs should also be finalised by GAIL expeditiously to safeguard the interests of the Government in terms of the quality and price of gas.

CAG also pulled up GAIL for defective metering of supply from HBJ pipeline which led to short-billed quantity of 1848.173 billion K cal valued at Rs 66.23 crore from April 1999 to March 2003. The report also highlighted how allotment and gas to Reliance Industries was increased without recovering transportation charges and by making cuts in the supply to priority sectors like power generation and fertiliser. This has resulted in loss of Rs 20.74 crore to GAIL.