Gas in a spot over pricing issues

The Indian gas industry has come under the spotlight adversely over the issue of pricing. This is indeed unfortunate.

The natural gas industry in India has emerged only recently, following the discovery and production of some gas. Since then, several major finds of other forms of gas — such as shale and coal-bed methane — have been identified and produced.

These hold the potential of altogether changing India’s energy scenario, in much the same way as in the US, where the discovery and production of shale gas has made that country almost self-sufficient in energy.

Some indication of this is available right away. Unlike in the case of oil, 70 per cent of gas consumed in the country is produced domestically and only 30 per cent is imported. In the case of oil, it is the other way around.

Significantly, the Indian natural gas industry has been nurtured by the private sector. Again, unlike oil, it is the private sector that has taken the early initiatives to develop the identified natural gas assets. These activities require large investments and for these to take place, correct pricing is essential.

Arm’s-length pricing

Recognising this, the Government provided for free market arm’s length pricing in the contracts that mandated the gas reserves to contractors for exploration and production. Problems arise when these terms are not followed. The Government has to approve the minimum well-head selling price as per the contract and not the actual selling price.

This clause was professedly introduced to ensure that private players do not undersell the gas because that would affect the Government’s royalty and PLP (Production-Linked Payment).

The price approvals clearly state that the royalty and PLP will be paid on the approved minimum well-head price or the actual selling price, whichever is higher.

The market price is not something dictated by the Government, but is arrived at by the buyers and sellers of any item. This normal functioning of the market-based economy and arm’s-length market-based pricing ensures that the process is not unduly influenced by either side. Along with the efficient use of gas, such pricing alone can facilitate the growth and development of the industry.

For development of newer forms of natural gas, namely, shale gas, availability of adequate pipeline infrastructure is all the more important.

Pipelines must be functional before tapping shale gas as its production peaks right at the beginning and unless pipelines are available, this will have to be flared. Great Eastern Energy Corporation Ltd, located in Asansol area, with its large concentration of industry, had to install and operate its own dedicated pipeline to supply the coal bed methane it produces.

Import parity

Presently, crude oil produced in the country is given import parity price. This is however denied for gas. If the same well produces oil and gas, then the former receives import parity price, while the latter does not. Such a system naturally discourages investment and development of the gas industry.

This is despite the fact that gas is a cleaner fuel and leaves a far smaller environmental footprint.

Something like this is already happening. In the absence of market-based pricing, which is the sole incentive for private investors, they are buying and developing gas assets overseas, instead of investing their money in domestic fields. As a result, employment is being generated in the host countries and their economies are being developed rather than ours. What’s worse is that India is importing this as LNG at global prices by paying foreign exchange.

Gas allocation

The principal obstacle to introducing arm’s-length market price for gas in India is the policy of allocation of gas to some so-called priority customers. Gas is allotted to fertiliser and power units and they are supposed to bid for price discovery. Why should anyone bid for anything when they know they have already been allocated their share?

If power or fertiliser cannot be produced at an “acceptable” price, using gas as feedstock at free-market pricing, then these industries could be given subsidised inputs directly by the Government. But the subsidy cannot come from private sector companies through a system of controlled-pricing regime for their output. Subsidy needs to be given by the Government and not the private sector, which pays royalties and taxes to the Government.

Rising imports

These facts have to be viewed against the overall energy scenario and the imbalances resulting thereof. Development of the natural gas industry in the country has major macro-economic implications as it can reduce imports of costly energy sources. Considering India’s large current account deficit, this could be a positive development with long-term implications and benefits.

Energy is the single largest import item. Given the present scenario of global economic uncertainty, inflow of overseas funds and exports have come down. Rising energy imports (last year’s imports totalled up to $180 billion against the overall trade deficit of $185 billion) are a major factor for India’s mounting trade deficit. Achieving energy security and self-sufficiency are priority goals for the country.

Accordingly, developing the gas industry by providing market-based pricing is the critical need of the hour.

(The author is President & COO, Great Eastern Energy Corporation Ltd.)

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