The Hindu Business Line : Inflammable, keep away

A lot of heat is being generated over the pricing of Reliance Industries’ KG Basin gas and the issue is getting curiouser by the day. After going through the Petroleum Ministry, a panel of secretaries and the Economic Advisory Council to the Prime Minister, the issue now rests before an Empowered Group of Ministers (EGoM). The issue is this: Is the price of $4.33 per million British thermal units (mbtu) at the wellhead, discovered by Reliance through a bidding process, fair, and is the company’s formula for price-discovery reasonable? Some prospective buyers of the gas, such as power and fertiliser producers, say no. They fault the process for lack of transparency and say the discovered price is not fair. The Economic Advisory Council’s report is clear that the price is comparable with other regional benchmarks, such as gas from the Ravva field, and that the pricing formula is broadly in line with industry norms. However, the report faults the bidding process for restricting eligible bidders and not indicating the total volume of gas available for bidding. It has suggested fresh, transparent bidding be done to arrive at the price.

Meanwhile, interested user lobbies have called upon the government to step in and make the price more affordable for power and fertiliser producers and also decide on allocation of gas to them. This is ridiculous, to say the least. The government is bound by the terms of the Production Sharing Contract (PSC) it signed with Reliance which restricts its role to merely approving the pricing formula and ensuring that the price discovered is on a “competitive, arm’s-length basis”. The government cannot and should not dictate either pricing or allocation to specific sectors, irrespective of who the field operator is. It should be left to the buyer and the seller to arrive at a price in a transparent manner, which is what the PSC has envisaged anyway. The government should step in only when such a discovered price appears unfair and not, reflective of prevailing market conditions.

The argument that fertiliser and power producers cannot afford market-determined prices for natural gas when their finished product is subject to administered pricing does not wash. The Economic Advisory Council report clearly points out that the fertiliser companies will remain competitive even at a delivered cost of $5.5-6 per mbtu, and so will power producers. The government anyway forks out hefty subsidies to fertiliser companies. The EGoM should not surrender to interested lobbies that would like a throwback to the administered price regime for gas. If Reliance’s method was wrong, it should be directed to go through the bidding process again, transparently. But to use that as justification for government intervention in pricing and allocation of gas is unacceptable in a free-market economy.

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