Last week, the group CEO of BP, Bob Dudley, and Reliance Industries’ Chairman Mukesh Ambani met the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and Petroleum Secretary Vivek Rae apparently to seek clarity on pricing of natural gas.
“They are very concerned and very keen that the Government takes a view (on pricing)”, Ahluwalia told press persons after that meeting.
Pricing formula
The root of the Dudley-Ambani concern is not hard to guess. They want more money for the gas from the D6 block at the Krishna-Godavari basin. In June last year, Reliance Industries, in its capacity as the ‘operator’ of the block, had submitted a pricing formula to be used for new contracts that would commence from April 1, 2014.
The formula was: Gas Price in $/MMBtu = 12.67%xJCC+$0.26, with JCC referring to the Japanese Crude Cocktail price. This is a standard formula, one that has been in use predominantly in Asian contracts for many years. Using this formula would fetch the D6 block operators — Reliance Industries, BP and Niko Resources — almost $13 per MMBTU, assuming a JCC price of $100 per barrel, compared with $4.2 that they are getting today.
However, if the method suggested by the Prime Minister-appointed Rangarajan Committee is used, they would get a gas price between $8 and $8.50 per MMBTU. That would be twice what they are getting today, but Bob Dudley and Mukesh Ambani are obviously not satisfied with it.
Moreover, it is possible that they are concerned that the Government might reject even the Committee’s recommendations and come up with another formula giving them a still lower price for their gas.
Gas-crude oil link
One hopes that the Government does not give up the Rangarajan Committee’s formula and uphold Reliance’s. The panel’s pricing mechanism is based on the average of the price for liquefied natural gas imported into India and a volume-weighted average of the prices of gas in North America, Europe and Japan.
Therefore, it is a formula where the inputs are all gas prices. This is unlike the formula submitted by Reliance, which links gas prices to that of crude oil.
Reliance’s argument is that any pricing mechanism for natural gas would have to willy-nilly be linked to crude oil, since there is no real free market for gas.
The argument may not hold though, given that today the link between oil and gas prices is vanishing.
In September 2012, the European Union launched investigations into the “behaviour” of the Russian gas major, Gazprom, on three counts, one of which was its linking of natural gas prices with crude oil’s. The investigations were launched with the purpose of determining a retaliatory action.
In an emailed response to Business Line ’s query a few months back, EU’s spokesperson Antoine Colombani said: “In the past, demand and supply for gas and oil were linked and oil-price indexation was widely used. In recent years, we have seen global oil markets and regional gas markets move apart. As a result, pricing patterns in the sector have evolved to reflect this changed situation. But if a dominant company decided to maintain oil price indexation without reflecting the evolution of market fundamentals, such behaviour could be abusive, in particular if this leads to higher prices while demand for gas actually decreases.”
Overseas gas markets
It does not call for a seer to divine that in the years to come, oil prices will have little or no bearing on gas prices, as the latter will have its own dynamics — availability, demand, development of pipeline and LGN infrastructure and the way the user industries shape up. There is little merit in linking oil and gas prices, the way Reliance has suggested.
Nor does it appear to be correct to say that there are no gas markets. Henry Hub in the US, National Balancing Point in the UK and Title Transfer Facility in the Netherlands are good price discovery points for their respective markets. Likewise, there is the need to develop an Indian gas market, which should determine the prices here.
Natural gas prices also vary wildly from market to market. The International Energy Agency in its World Energy Outlook of 2011 predicted gas prices in 2020 at $6.70/MMBTU in the US, $13 in Europe and $16.20 in Japan.
The Rangarajan Committee’s recommendations may be fine for the short term, but in the long term, there is no sense in assuming a cocktail of such disparate prices as a good proxy for India. The need, indeed, is for developing an ‘Indian’ gas price, based on local conditions.
One cannot also but note the irony that while BP and Reliance are “concerned”, the third partner in D6 — Niko Resources of Canada — seems to be quite happy about what lies ahead.
In a recent message to shareholders, the company’s President and CEO, Edward Sampson, observed that the business environment in India had “improved significantly” and cited the Rangarajan Committee’s report as an example.
It is also pertinent to point out that while the D6 partners, Niko included, consider the current price of $4.2 per MMBTU inadequate, the latter has signed a long-term contract to sell its gas from Block 9 in Bangladesh at $2.34 per MMBTU.
Pricing any resource
Apart from the pricing of natural gas, there should be a fundamental change in thinking even when it comes to pricing of any natural resource — whether crude oil, gas or iron ore.
These resources ultimately belong to the people of India. Companies such as Reliance or NMDC are only agents that perform the job of getting the resource out of the ground — for which, of course, they have to be richly rewarded.
But linking the prices at which they will sell Indian resources to Indian people to international prices is meaningless.
Should I, after all, pay a higher price for the crude oil produced in my backyard just because international prices have risen due to some disturbance in the Strait of Hormuz?