The political and economic twists of deferred gas price hike

Arvind Kejriwal has every reason to be happy with the Election Commission asking the Petroleum and Natural Gas Ministry to put on hold the gas price hike. But for gas producers such as ONGC, Oil India, Cairn India, and Reliance Industries this means short-term instability. And, for the country, it can have long-term implications.

According to experts, in the short term the decision to defer the proposed new price (based on Rangarajan formula) that would have almost doubled the rates from the current $4.2/unit (gas is measured in million British thermal units) will impact the quarterly revenues of the gas-producers.

And, if the new government fails to take a decision quickly, it will send negative signals to foreign investors and also impact investments by domestic players.

The new price was to come into effect from April 1. The issue took on political colours when allegations were made that the Government was favouring Reliance Industries. The AAP had alleged that this not only exposed the Congress, but also the BJP, particularly its Prime Ministerial candidate Narendra Modi, who has been maintaining a ‘mysterious’ silence on this issue.

Caught in this imbroglio, a cautious Ministry referred the matter to the Election Commission even though the issue did not require its approval. Some saw this as the Government’s way of delaying the controversial decision and passing the buck on to the new regime.

Narendra Taneja, National Convener, Energy Cell, Bharatiya Janata Party told Business Line that if the BJP is voted to power it will look at all facts, ground realities, and keep the stakeholders, particularly consumers, in mind. If this means reviewing the pricing formula, so be it, said Taneja.

Dilip Khanna, Partner Oil & Gas, EY, said, “From a domestic market perspective and encouraging investments in the sector, the hike was very important both for existing players as well as sending an important signal to global companies which are in a ‘wait-and-watch’ mode as far as India is concerned.”

According to the industry, not only Reliance, but ONGC and Oil India will also benefit from the hike. In fact, the biggest beneficiary would be ONGC.

Gas producers do make money at the current price, but that may not be enough for future investment decisions as costs have gone up significantly. Drilling a deepwater well costs $60-100 million and onland $1-5 million.

ONGC Chairman and Managing Director DK Sarraf had said that the proposed hike may not be enough to make all finds commercially viable.

Speaking to Business Line he said, “This is only a deferment and relates to the timing of the decision. A decision will be taken by the next Government. My belief is that the new government will reach the same conclusion based on the same facts and figures, which the current government had reached after much deliberations.”

Private sector explorers, such as RIL, echoing this, have been seeking a market-linked price.

While this decision does not create uncertainty for ONGC, Oil India and other producers, it does so for Reliance. The current gas price for the Reliance-operated D6 block expires on March 31 and the contractors (RIL-BP-Niko) need to know at what rates they will sell from April 1.

Reliance Executive Director PMS Prasad met Petroleum Secretary Saurabh Chandra on Tuesday regarding the issue. Sources said a provision in the agreement says that if for any reason the price is not revised on expiry of contract, the existing price will continue. But this has to be communicated to the contractors.

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