Half way to sanity

The best that can be said about the Rangarajan Committee’s recommendation on linking the price of domestically produced gas to an average of international benchmarks is that it is superior to the present opaque regime of determining prices by government fiat. It requires no great perspicacity to say that the latter is the surest way to discourage any worthwhile investment in exploration and production (E&P) activity. This is something India — which already imports a fifth of its gas and coal needs, not to speak of well over three-fourths in oil — simply cannot afford. With more than 50 per cent of its on-land and offshore sedimentary basins not even explored, leave alone developed for commercial exploitation, it is criminal not to give E&P firms operating in the country the freedom they would enjoy with regard to hydrocarbon assets elsewhere.

While taking the average of three global benchmark rates (US’ Henry Hub for North America, UK’s National Balancing Point for Europe, and Japan for Asia-Pacific) translates into a reasonably arm’s-length competitive price to be fixed for Indian gas, it still begs the question: Why fix prices at all? A major reason why the Government’s New Exploration and Licensing Policy (NELP) attracted huge initial interest from E&P majors worldwide was the promise of market-driven prices in return for the risks of exploration and development being borne by them. But as the Government reneged on this promise (with some self-serving acquiescence from the only serious player who could have demanded such marketing freedom) and got into the business of telling contractors how much and whom to sell at what price, the subsequent NELP rounds turned into flop-shows. The search for an appropriate formula for price-fixing — which is what even the Committee headed by the Chairman of the Prime Minister’s Economic Advisory Council, C. Rangarajan, has sought — reflects the same obsession with playing God.

The Rangarajan panel has defended a formula-based price mainly on grounds that the Indian gas market is “predominantly monopolistic” with a handful of suppliers and a large numbers of consumers. The latter include fertiliser and power firms not enjoying sufficient freedom to pass on the higher feedstock costs in the event of complete gas price deregulation. The situation would be rendered worse because of infrastructural constraints, from inadequate internal pipeline networks to re-gasification terminal capacities for handling imported gas. But this logic is akin to denying the Punjabi wheat farmer higher prices till the establishment of a countrywide mandi infrastructure allowing grain from eastern Uttar Pradesh or Bihar to be competitively sold. A competitive gas market in India will come with a freeing of prices, which would, on their own, induce investments in E&P and related handling infrastructure. The same applies to pricing of urea or power produced from gas; the mess that these sectors find themselves is precisely the result of the Government playing God.

Keywords: Natural gas prices and investment

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