The problem with India’s energy policy is that it’s driven by an outmoded agenda. A true example of this phenomenon is the controversy on pricing of natural gas. India is not powered by gas. It should not be. We have limited gas resources but we have the world’s fourth largest reserves of the cheapest fuel, coal.

A thumb rule comparison suggests that coal priced at $100 a tonne generates energy equivalent to gas priced at $3.5 per mmBtu (million metric British thermal unit). In India the price of average thermal coal, used by the power sector, would not cross $21 a tonne (post-beneficiation).

At the current price of $4.2 per mmBtu, gas stands no chance even before imported coal, priced below $50 a tonne at Indian ports. India is no exception here. The manufacturing boom in China was almost fuelled by coal. Despite the arrival of shale gas, coal is the most popular fuel for electricity generation in America (39 per cent in 2013) and, according to the US Energy Information Administration, will continue to be so for the next two decades.

Europe is shutting down gas-fired plants for coal. And, this year both Japan and South Korea, the largest importer of energy commodities, decided to go the whole hog for coal (and nuclear), as a long-term energy source.

In the emerging scenario, gas will play second fiddle.

Wrong focus Therefore, one would have expected India to resolve its coal production issues. But we decided to do the opposite. While the demand-supply gap for domestic coal went on increasing, the erstwhile UPA government (2004-2014) all but decided to double the well-head price of natural gas from $4.2 to nearly $8.4 per million metric British thermal unit (mmBtu), based on the Rangarajan formula, so as to attract more investments in oil and gas exploration.

The complex formula tried to establish a “theoretical” market price for domestic gas by linking it with imported LNG on long-term contracts: the weighted average of prices at trading hubs like Henry Hub in the US and National Balancing Point (NBP) in the UK and the cost of sourcing LNG for Japan.

Both the formula and the Cabinet decision came at a time when global gas prices (except in the US) were booming, riding on increased consumption by Japan and Korea following the Fukushima disaster in March 2011. For three years till February 2014, spot LNG prices nearly doubled to $20 a mmBtu in Asia. The oil and gas sector jumped in to exploit the opportunity. Russia put further pressure on Europe, sending the NBP benchmark index from $6.5 in 2010 to $10.6 a mmBtu in 2013. In India, gas producers pitched for higher returns, ranging up to $13 per mmBtu.

Unviable prices The new gas prices were scheduled for implementation from April 1. According to available reports, the Narendra Modi government now wants to revise the prices to $6-6.5 an mmBtu. The decision has caused heartburn among Indian producers. But there is little doubt that at $8.4/mmBtu, India offered one of the highest (if not the highest) return to producers.

It is arguable if the shallow water and onshore gas that forms lion’s share of Indian basket is priced over $6 anywhere in the world. Even deepwater-gas from Brazil may be cheaper. True, some of the upcoming projects in Australia and Mozambique expected higher returns. But it is debatable if they will now find many takers.

Following the strategic shift of Japan to coal, Asian LNG prices halved to $10 per mmBtu in July. Notwithstanding the Ukraine crisis, gas prices hit a 51-month low in the UK.

In the US, where shale gas producers were complaining about low returns, prices did move from as low as $1.94 in April 2012 to $6.90 an mmBtu in February 2014. But, pressure from coal has quickly brought the Henry Hub benchmark down to $3.87 per mmBtu (August 4). The changing scenario has already cast a shadow over some of the high cost LNG projects in Australia, where the manufacturing sector is now demanding a cap on domestic gas prices.

The bottom line is that at a time when India is contemplating a 40-50 per cent hike in domestic gas prices, the world is moving in the other direction. And that triggers the obvious question: Should gas face more intense competition from coal in India?

Under state protection Sadly, there is no way to ascertain the correct gas price for India. This is because the gas market is more protected than the nationalised coal sector. The Government still allocates coal, largely to ensure supply of cheap fuel to the regulated electricity generation sector. The national miner, Coal India, has considerable pricing power.

Sectors like steel or cement that operate in the open market purchase fuel at a price that is 40 per cent higher than power. Further, CIL is allowed to offload over one-tenth of its production in the open market. The reforms attracted industrial investments in coal-bearing states. CIL cannot make windfall profits from a power sector that consumes 80 per cent of the fuel. The realisation on the residual 20 per cent production can never be higher than the landed cost of imports. Yet, the miner operates at a 25 per cent net profit margin (2012-13).

Create free market of gas The situation is diametrically opposite in the case of gas. Gas prices are the State’s domain. The Government could create a framework for gas marketing so as to attract investment in targeted user industries. It may also force gas producers to sell a part of the production, at regulated price, to strategic sectors like fertiliser.

But why should New Delhi decide how much gas is to be sold to which company and in which State? Why should it take the fuel produced on the east coast to Jammu and Kashmir in the extreme north, denying the prospects of industrialisation in Andhra Pradesh and Telangana, located right on the well-head?

Clearly, it’s the same obscure economics that saw gas produced in Bombay High, on the west coast, travelling 1,400 km to Delhi and Uttar Pradesh. It is inexplicable why a scarce resource that has alternative uses should be used to generate electricity in the national capital, when coal-fired plants are suffering from low capacity utilisation due to lukewarm demand.

Remove the life-support and the cost inefficiency of the gas economy will be clear as daylight. No amount of exploration could establish the existence of a large gas pool in India. All those dramatic projections on KG gas proved a figment of the imagination. Then why fuel the public perception that the gas price hike is to benefit oil companies? It is better to let them fend for themselves within a broad framework. And focus on clean coal technologies for a long-term energy solution.

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