No case for hike in KG gas price

Arvind Kejriwal has expressed serious concern over the price hike in gas supplies from RIL’s KG fields. He has also alluded to a bonanza of Rs 45,000 crore that would accrue to Mukesh Ambani over the next two years.

Whether or not the Government acquiesces to RIL’s demand for hike in price from the existing $4.2 per mbtu (million British thermal unit) to around $14 per mbtu is a matter on which the EGoM has to take a call. However, what it will have in store for the economy is an issue that we need to seriously consider.

India imports 80 per cent of its crude requirements. Apart from being a cleaner fuel, gas offers enormous scope for reducing import dependence for our energy needs. Supplies from KG, i.e. 80 million standard cubic metres per day (mscmd) (promised throughput as per the production-sharing contract) account for close to 50 per cent of total gas supply.

Around 75-80 per cent of gas is consumed by fertiliser and power sectors. While fertilisers are vital for the country’s food security, power is critical to our very survival. Therefore, pricing of gas will have serious ramifications for both the sectors and, in turn, the health of the economy.

FERTILISER IMPACT

Assuming 24 mbtu as energy consumption for an efficiently run gas-based urea plant, an increase of $10 per mbtu in price will increase its production cost by $240 per tonne or Rs 13,200 per tonne.

This is 2.5 times the current MRP of urea Rs 5,310 per tonne!

Under the current dispensation of NPS (new price scheme) for urea, cost escalation cannot be passed on to farmers. But producers are compensated by way of increase in subsidy payable under the scheme. So, subsidy payments will increase.

Around 80 per cent of the total urea production of 22 million tonnes is based on gas. Thus, on gas-based production of 17.6 million tonnes, and assuming that 50 per cent of this is fed by supplies from KG fields, the gas price hike will lead to an additional subsidy of Rs 11,616 crore.

If RIL is allowed the proposed price hike, why would other suppliers be left behind? ONGC & OIL too have been lobbying for a steep increase. If the Government were to permit the same hike to them as well, additional subsidy payout will double to Rs 23,232 crore.

Producers of P&K fertilisers using ammonia made from gas too will be impacted. Under NBS (nutrient based scheme) where subsidy is ‘uniform’ and linked to import parity price (IMPP), the Government may not be obliged to increase subsidy. Here, farmers will be hit as producers are free to increase MRP.

POWER SECTOR EFFECT

In the power sector, nearly 30 per cent of generation capacity is based on gas and is on increase. The Government is boosting gas not just because it is environmentally benign, but also keeping in mind the uncertainties with regard to CIL arranging the required coal supplies for thermal plants.

Like fertilisers, cost of power generation too will be seriously impacted by increases in gas price. Wherever the PPA (power purchase agreement) allows for pass-through of fuel costs, households and industries will be crippled. And, where this is not allowed, power producers will turn unviable.

The price increase will also boost subsidy on LPG from an already high level of Rs 36,000 crore (likely for current year). In case the government dispenses with subsidy, this will hit millions of consumers of LPG.

Given the huge shortfall in availability of domestic gas vis-a-vis demand, imported LNG (liquefied natural gas) is assuming great importance. Already, around 33 million tonne of capacity for handling and re-gasification exists, or is in the process of being commissioned.

LNG is being sold to customers at $14-16 per mbtu, around the same price that RIL is seeking for its supplies. Now, if the government sets price of domestic gas (for RIL & ONGC supplies) at $14 per mbtu, LNG too is unlikely to be available at a lower price, even if global demand-supply factors turn favourable.

Already, the country is reeling under double-digit inflation and a ballooning fiscal deficit. The hike in gas price, if allowed, will worsen these problems, thus causing irreparable damage.

GOLD-PLATING

Former Minister for Petroleum & Natural Gas Jaipal Reddy would have taken into account these implications while resisting price hike thus far. Following the recent change of guard, proposal appears to have been resurrected at the highest level.

Instead of looking for easy options, the government should look at the big picture and do what is in the best interest of economy. In 1991, the JPC on fertilisers pricing under Pratap Rao Bhosle had recommended that fertiliser plants should not be charged more than $1.0 per mbtu!

Instead, they were charged $2.5 per mbtu on gas supplied to plants located along HBJ pipeline. In 2007, EGoM ‘unilaterally’ allowed a price of $4.2 per mbtu as against a ‘competitive bid’ based price of $2.4 per mbtu (determined in respect of supplies to NTPC plants)!

Revelations in the CAG report point towards possibility of huge inflation in capital expenditure incurred in exploration and development of KG fields. For increase in throughput from 40 mscmd to 80 mscmd, a three-fold hike in expenses defies all plausible explanations!

TIME TO RETHINK

Far from contemplating an increase, there is an urgent need to take a re-look at the current price of $4.2 per mbtu. The government has ample time for introspection, as the next revision is due only in 2014.

Meanwhile, it should goad RIL into taking all necessary steps to restore supplies from the current precariously low level of around 20-25 mscmd to promised 80 mscmd (while doing so, it must not allow its mind to be conditioned by latter’s expectations in regard to price). This would help fertiliser and power plants save on costlier LNG and other fuels, which they are currently forced to use to circumvent the shortfall in gas. The rest of economy too will get a boost.

(The author is Executive Director, CropLife India. Views are personal.)

COMMENT NOW