Gas policy – from one mess to another

Immediately after the Cabinet decision on a new structure of gas pricing – that would double gas price from April 2014 — the Ministry of Finance asked the Ministry of Petroleum and Natural Gas to consider “making up for quantity by which RIL had missed target of supplies from its KG-D6 block at old price”.

Now, Parliament’s Standing Committee on Finance has endorsed the MoF’s stance.

The context here is supplies from Dhirubhai 1 and 3 fields (D 1& 3). These fields commenced gas production in 2009. After reaching a peak of 60 mmscmd in 2010, production declined to 26 mmscmd in 2012-13 and further down to 14 mmscmd in 2013-14, against a commitment of 80 mmscmd. The concept of ‘making up’ is flawed.

Due to the inability of RIL to fulfil its commitment on supplies, user industries suffered a loss. If the committee or MoF is of the view that this loss needs to be compensated, their recommendation comes nowhere near that.

All that it does is exempt a certain portion of ‘future’ supplies (equal to the cumulative shortfall of past 4 years) from higher price effective from April 2014. This merely prevents a potential extra burden on users.

User industries made up the shortfall by importing LNG at 3-4 times the extant domestic price.

No more production

Recently, in a letter to the committee, RIL has stated that not much gas can be produced from D1 and 3 fields; drilling further wells in fields would not add any incremental production, but only lead to infructuous investments. So, there won’t be any more production.

Not even an iota of the shortfall of 66 mmscmd (committed 80 mmscmd minus the current supply of rate 14 mmscmd) will be available.

The fertiliser industry needs around 47 mmscmd. Of this, it gets 16 mmscmd from ONGC/OIL; the balance 31 mmscmd was linked to KG-D6. Now, it may not get more than 10 mmscmd.

For sourcing 21 mmscmd as liquefied natural gas (LNG), it will have to shell out Rs 30,000 crore more. That will bloat the fertiliser subsidy bill.

Twentyfive power projects were to get about 30 mmscmd from KG-D6. They too will have to go for imported LNG, which is 3-4 times more expensive than domestic gas. This, in turn, will cause a steep increase in power tariff.

Why the decline

The capability to deliver 80 mmscmd was assessed on the basis of evaluation by reputed international consultants. This was also independently examined by the Directorate-General of Hydrocarbons (DGH) prior to acceptance.

RIL has attributed the decline to “subsequent geological surprises” and has requested the appointment of an independent international expert for a technical evaluation of reservoir “to verify facts in order to clear all doubts and apprehensions”.

If another independent international expert is needed to testify what the contractor says now is correct, then what should one make of an earlier international expert’s claim, authenticated by the DGH?

When the GoM was deliberating over the recommendations of the Rangarajan Committee, there was a hue and cry that even $8.4 per mBtu wouldn’t provide the required incentive.

Exploration and production (E&P) companies pitched for a price substantially higher than this. A study commissioned by BP opined that at $8 per mBtu, by 2025, India would import 68 per cent of its gas requirement. At $12 per mBtu, however, import dependence would go down to 24 per cent.

The MoF and the Planning Commission (PC) were more than willing to adopt a more generous pricing formula. In a scenario proposed by MoF (Rangarajan methodology excluding hubs and taking only long-term prices), an indicative price was $10.29 per mBtu in 2014-15 and $10.92 per mBtu in 2015-16.

Unjustified link

True, E&P companies need an ‘incentive’.

But, to say that this will come only when price is linked to imported LNG is unjustified. The global market for LNG is oligopolistic. These cannot guide domestic price.

A tenable approach would be to take hub prices, namely Henry Hub (US) and NBC (UK) (conveniently ignored by the MoF and overshadowed in the Rangarajan formula by imported LNG).

That gels with the cost of production approach, too.

If production has suffered primarily due to ‘technical’ problems or ‘geological surprises’, pricing cannot offer solutions..

What’s adequate

Therefore, if the right approach is adopted in terms of exploration and production, a reasonable price already in vogue will be adequate. If things go wrong, any level of price, howsoever high, cannot come to the rescue.

In respect of supplies of this very gas to NTPC in 2007, a price of $2.4 per mbtu was determined based on “competitive bid”.

E&P companies should help create a conducive environment for arriving at a price that marries their interest with those of users.

End product prices of major users, fertilisers and power, are inflexible and huge subsidy support is involved. Given the compulsions of fiscal consolidation, the Government cannot provide open-ended subsidies.

Geological and technical issues need to be tackled on a war footing.

Besides, the Government needs to cut bureaucratic delays and speed up clearances to bring discoveries to production.

Half-hearted palliatives like exonerating a certain portion of the supplies from higher prices won’t work. The need of hour is to boost domestic production to meet rising demand.

(The author is a policy analyst.)