Gas pricing rewards the defaulter

The Government has given Reliance a pretty long rope, despite its inability to meet its production sharing contract (PSC).

This has led to fertiliser and power companies being badly hit for no fault of theirs. Will these companies be compensated for losses?

First, for some background on how the PSC came unstuck. In June, 2013, Cabinet had decided to double price of domestic gas from $ 4.2 per mBtu to $ 8.4 per mBtu from April 2014, based on recommendations of a Committee under C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council (PMEAC).

However, a notification was held back in view of a dispute with RIL-BP-Nikko, operating the D 1, 3 fields in KG basin. The bone of contention was a huge shortfall in supply of gas as against the committed quantity under the production sharing contract (PSC).

The Ministry of Petroleum & Natural Gas (MPNG) argued that RIL had deliberately not drilled the required number of wells (also described as ‘hoarding’ of gas).

RIL maintains that this was due ‘geological’ factors hence, beyond its control.

PENALTY IMPOSED The MPNG imposed a penalty initially of around $1 billion (in July 2013) and subsequently raised it to $1.9 billion for failure of RIL to meet its supply commitments. The operator contested this imposition and matter is now under arbitration.

There was also a strong feeling within Government, especially in the Finance Ministry, that RIL should not be granted benefit of a price hike till it fully makes up for shortfall. In other words, it should continue to get only $4.2 per mBtu from April 2014.

RIL contested this too on same ground, namely, that reduction in supply was due to factors beyond its control; that it did not indulge in hoarding. Downstream industries

Till the investigation is completed, for the interim, Cabinet has approved an arrangement under which RIL will get a higher price of $8.4 per mBtu, subject to its furnishing a bank guarantee. The guarantee is intended to cover the differential in price.

If investigations establish that RIL had indulged in hoarding of gas, the guarantee amount would be encashed. The Finance Minister had reportedly mooted depositing money in an ‘escrow’ account; but this is not reflected in the Cabinet’s decision.

The guarantee amount of $147 million every quarter has been computed on the basis of 10 mmscmd (million metric standard cubic metres per day) gas supply.

This works out to around $600 million per annum. (The relationship between mmscmd and mBtu is explained in a subsequent passage.)

The Government is acting with alacrity to accommodate the interest of a contractor who has reneged on its commitment to supply gas; a violation that has caused huge losses to user industries.

The fertiliser industry needs around 47 mmscmd.

Of this, it gets 16 mmscmd from ONGC/OIL. It was to get the balance 31 mmscmd from KG-D6. However, supplies were progressively reduced to 10 mmscmd and now have totally dried up.

Since, LNG import is at 3-4 times the current domestic price of gas, to meet entire shortfall of 31 mmscmd, the fertiliser industry will have to shell out Rs 45,000 crore annually. Given the fiscal crunch, it cannot even hope to be reimbursed through higher subsidy.

Some 25 power projects were to get about 30 mmscmd from KG-D6. The gas based power plants are operating at a measly PLF (plant load factor) of 24 per cent, thanks to a nosedive in gas supply.

The Ratnagiri power project (erstwhile Dabhol) is on the verge of turning into NPA (non-performing asset) .

Has Government thought of compensating these industries for the losses suffered in past? Will it consider using the penalty of $1.9 billion (assuming the outcome of arbitration in its favour) to neutralise their losses? How does it intend to help them in future?

Immediately after the Cabinet decision (June 13) on doubling of gas price, Chidambaram had promised to consider a special dispensation for fertiliser and power units. The intent was to ‘immunise’ them from price hike. That is forgotten.

QUESTIONABLE PRICING Parliament’s Standing Committee on Finance had asked Government to do a re-think on pricing of gas emphasising in particular, need for looking at cost of exploration and production.

By any stretch of imagination, the existing price of $4.2 per mBtu is not a bottleneck.

The Government has simply glossed over the recommendations of the Standing Committee and gone ahead with 100 per cent price hike based on the Rangarajan panel’s methodology.

No attempt is made to even address infirmities in formula e.g., including price of LNG supplies to Japan which includes a huge premium!

The assurance of full price of $8.4 per mBtu — for shortfall in supplies — by a huge climb-down. Putting the price differential in an escrow account too has been cleverly avoided. Worse still, the Government has been generous in determining the guarantee amount.

Reportedly, $147 million every quarter is arrived at using a supply of 10 mmscmd, whereas, the actual shortfall was substantially higher at 123 mmscmd during 2009-10 to 2013-14. How much should RIL keep aside?

Four mBtu (million British thermal units) make up 1 mKcal (million kilo calories). One standard cubic metre equals 10,000 Kcal.

Therefore, 1 mmscmd equals 10,000 million Kcal. At $4.2 per mBtu (8.4 minus 4.2), the value of 1 mmscmd is $168,000 (4.2x4x10,000).

Annualised this translates to $62 million (0.168x365). For shortfall of 123 mmscmd, total value of price differential is around $7.6 billion. At $147 million every quarter, it will take 13 years to garner the entire amount!

Juxtapose all this benevolence showered on Team RIL with the following:

Initial target of production from D1 and D3 was 40 mmscmd at a cost of $2.4 billion (2004). This was increased to 80 mmscmd at cost $8.8 billion (2006).

PRODUCTION MYSTERY The capability to deliver 80 mmscmd was assessed on basis of evaluation by reputed international consultants and independent examination by DGH. So, how come fields have gone completely dry and we can’t hope to get even 1 mmscmd?

A consultant appointed by DGH has already testified that RIL has the capability to deliver, provided it drills. The latter would like the assessment to be done by an international consultant.

Clearly, if India’s E&P for gas has suffered, the issue is the mess in our regulatory architecture and complete lack of accountability.

The government needs to clear this maze.

As regards pricing, it would be far better to make it ‘market-driven’ rather than present convoluted administered regime that puts users at the receiving end.

(The author is a policy analyst.)

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