No basis to gas price hike

The Cabinet Committee on Economic Affairs has approved doubling the gas price from the existing $4.2 per mBtu to $8.4 per mBtu for all domestically produced gas. Applicable from April 2014, the revised price is based on a slight modification of the Rangarajan panel’s formula.

The Cabinet took the decision despite strong opposition from two key Ministries viz., fertiliser and power. While the Power Ministry wanted price to be maintained at the existing $4.2 per mBtu, the Fertiliser Ministry was reconciled to $6.7 per mBtu mooted by the Ministry of Petroleum and Natural Gas (MPNG).

Subsidy burden

Fertiliser and power are most critical sectors, which consume nearly 75 per cent of domestic gas. They are hamstrung by regulatory controls and have no flexibility whatsoever insofar as pricing of their respective products is concerned.

The Government controls MRP of urea at a low level and shudders at the very thought of increasing it even by a small amount (last year, a hike of a mere 10 per cent recommended by the Committee of Secretaries was rejected by the Fertiliser Minister) not to speak of the substantial increase that any steep increase in input cost — like this one — would necessitate.

Power tariffs too cannot be raised so easily. Under the restructuring package recently approved by the Government to bail out SEBs/power distribution companies (PDS), States are required to increase tariff to cover the ‘existing’ huge gap between their receipts and payments. That is easier said than done!

Faced with a steep increase in input prices and resistance to hike in output price, fertiliser subsidy ballooned to unsustainable levels (Rs 1,02,207 crore in 2012-13). For the same reason, state electricity boards had a cumulative loss of over Rs 200,000 crore.

Hike in gas price will increase production cost of urea by Rs 6,300 per tonne (25 mBtu for a tonne of urea at $=Rs 60). Going by past record, hike in urea MRP is ruled out.

So, the entire increase will have to be absorbed in subsidy. On production of 23 million tonnes, the extra burden will be Rs 14,500 crore.

Under urea investment policy (UIP) based on EGoM recommendations (February 2012) a total of 20 million tonnes additional capacity has been mooted. At landed price of around $10 per mBtu (including royalty, taxes, transport, etc.), gas cost alone would be Rs 15,000 per tonne. That adds another Rs 30,000 crore.

The impact on power sector too would be mind-boggling. A dollar increase in price raises cost of generation by about 50 paise per kwh (2000 kcal for a unit at $1=Rs 60). On $4.2 per mBtu, increase in power cost would be Rs 2 per kwh or about Rs 45,000 crore per annum.

Hub prices as benchmark

The Cabinet has justified its action solely on the ground that at existing price, domestic exploration and production was not viable.

Since LNG costs three times as much, it is necessary to incentivise domestic production which even at revised price would be lower than imported LNG.

The price of gas in exporting countries is a ‘fraction’ of what importing countries such as India pay. In Oman, the ammonia/urea joint venture of OOC (Oman Oil Company) with Iffco/Kribhco gets gas at no more than $3 per mBtu. The price even at HH (US) is $3-4 per mBtu. Yet, on reaching India, it shoots to $12-14 due to liquefaction, transportation, re-gasification, etc.

These add-ons are not relevant in the context of pricing domestic gas. Therefore, it would be inappropriate to use imported LNG as a benchmark. It may be argued while arriving at net-back these add-ons are excluded. If that be so, logically we should straight away look at ‘hub’ prices.

The gas market in India right now is nascent. In a fully mature and developed market, say, 10 years from now, prices will be market determined. Till then, and keeping in mind compulsions of fertiliser and power, why not use hub prices in the US/UK as benchmark?

Under the production-sharing contract (PSC) with respect to acreages awarded under NELP, contractors were allowed to charge price determined through competitive bidding based on ‘arms-length’ principle.

In 2007, for supplies to NTPC power plants, price determined under this procedure was $2.34 per mBtu.

Yet, GoM then approved much higher $4.2 per mBtu. This price is higher than the gas price in exporting countries or even hub prices.

Why then is this perceived as unviable? Shorn of rhetoric, we need to look at the facts on the ground.

Four mBtu (million British thermal units) make up 1 mKcal (million kilo calories). One standard cubic meter equals 10,000 Kcal. Therefore, 1 mmscmd equals 10,000 million Kcal. @ US$ 4.2 per mBtu, the value of 1 mmscmd is US$ 168,000 (4.2x4x10,000).

At present, production from KG-D6 is 15 mmscmd (against committed production of 80 mmscmd). That gives a daily revenue of $2.52 million (168000x15). Annualised, revenue generation would be $920 million.

RIL was unable to achieve promised production due to technical snags viz., water and sand ingress. It would be far-fetched to link this to ‘alleged’ lack of any incentive. It needs to focus on reviving production to the target level. That by itself will multiply revenue generation.

At 80 mmscmd, the revenue will be about $5 billion per annum (920x80/15). At this rate, it would be possible to recover investment of $8.8 billion in exploration and development within two years. Even at 40 mmscmd (level reached initially), revenue will be $2.5 billion; that would ensure recovery in four years.

Wide reforms needed

Clearly, any increase in price beyond the existing level is unjustified. This would result in a windfall for RIL and ONGC/OIL (ONGC gain would almost equal extra outgo on fertiliser subsidy) at the cost of fertiliser and power which are already squeezed.

Finance Minister P Chidambaram has hinted at giving a special price to fertiliser and power. If Government recognises the concerns of these two major sectors which use 75 per cent of domestic gas then why raise price in the very first place?

Still, if gas suppliers feel they must get market-determined price — as promised under PSC — and Government too shares this, then the latter should let the market determine prices for fertiliser and power too.

Reforms should embrace all three sectors fertiliser, power and gas.

The author is a policy analyst.

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