`Where there is a significant shortage of supply and a monopoly producer and distributor, allowing the `market' to determine the price will only lead to exploitation.'

Our Bureau

Hyderabad, Feb. 7

THE Andhra Pradesh Government has urged the Prime Minister to intervene and ensure that a market regulator be established by statute for upstream gas production.

In a letter to the Prime Minister, Dr Manmohan Singh, the Chief Minister, Dr Y.S. Rajasekhara Reddy, said the statute may include specific provisions to empower the regulator to fix price on a cost-plus basis initially, and to gradually introduce competition in the market as the number of players and production increases, leading to eventual deregulation.

Any increase in gas price will have substantial implications on the price of power in Andhra Pradesh and will result in an unjustifiable increase in power sector tariffs. Such an increase will not only bring power sector reforms into disrepute, but will also adversely impact the overall economy of the country, the Chief Minister said in the letter.

Dr Reddy drew the PM's attention to his earlier letter dated March 9, 2005 wherein he had requested that a regulator for pricing of domestically produced gas be appointed.

Pursuant to that letter, a meeting was convened by the Cabinet Secretary with the Chief Secretary of Andhra Pradesh. During the meeting, the Secretary/Ministry of Petroleum and Natural Gas said that necessary legislation with regard to the establishment of an independent regulator for downstream gas had been drafted and it was proposed to be placed before Parliament in its next session.

However, he clarified that for upstream gas, the production sharing contracts for each field would be different and the prices would be related to the market, hence it would be difficult to prescribe a fixed price.

The Chief Minister said: " I would like to bring to your kind attention the fallacy of relating price to the `market' in the gas sector, where there is a significant shortage of supply and a monopoly producer and distributor. Given this situation, allowing the `market' to determine the price will only lead to exploitation."

As an example, in a recent letter to gas-based power projects in Andhra Pradesh, GAIL had informed that ONGC will charge `market' prices at $4.6 per MMBTU (million metric British thermal unit), and with the addition of compression charges of $0.3, the total price per MMBTU will be $4.9 per MMBTU (excluding transportation charges), Dr Reddy said.

Only two years ago, NTPC had through tender, obtained a price of $2.97 per MMBTU (including transportation charges) for deep-sea gas. Since then, there has been a further reduction in the supply of gas, and the communication offering gas at $4.9 per MMBTU only validates our stand that no market can operate in a shortage situation and when there are an inadequate number of players.

Therefore, the stand of the Ministry of Petroleum and Natural Gas that pricing for upstream gas would be related to the `market' may not be sustainable. If the `market' being referred to is the international market, it is unacceptable, as gas exploration and production are indigenous efforts.

It is for the above reasons that we have been requesting that a market regulator be put in place for domestically produced natural gas, the Chief Minister said in the letter.

(This article was published in the Business Line print edition dated February 8, 2006)
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