Why a price stimulus for gas?

In his Budget speech, finance minister Arun Jaitley lamented the situation of “rising demand, near-stagnation in production and consequent rapid increase in import” in the case of gas. He argued that there was need to incentivise gas production from deep water, ultra-deep water and high-pressure-high-temperature areas.

“A proposal is under consideration for new discoveries and areas which are yet to commence production, first to provide calibrated marketing freedom; and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels”.

The concern expressed in the speech is not new. The government was mindful of this in October, 2014 when it notified guidelines to fix price of all domestic gas based on weighted average of gas prices prevailing in four international locations. Then, it said “for deep water blocs, ultra-deep water blocs which present challenging geological environment, it will consider giving a ‘premium’ price to be determined in a transparent manner based on clearly laid down criteria.”

In May, 2015, ministry of petroleum and natural gas (MPNG) proposed that operators be allowed market-based pricing for a certain percentage of production from these fields. The share eligible for market determined price could vary from 20-50 per cent depending on degree of toughness of concerned field. But, proposal was shot down by ministry of finance (MOF). It cited two reasons.

First, market for gas being ‘nascent’ and given huge supply-demand gap, leaving producers free to charge market based price will lead to a sharp increase. Second, fertilisers and power — two major users — have their output prices under control and until such time these industries are freed, removing control on price of gas will have grave implications viz., increase in subsidy on fertilisers and hike in power tariff, affecting millions of consumers.

Until four months back, MoF was stuck to the above stance. What has prompted the finance minister to change this? Have the concerns for fertilisers and power become irrelevant now?

Ever since the new gas pricing guidelines were put in force, the government is under increasing pressure from operators to increase the price. They say that at existing administered price (currently $3.82 per mBtu w.e.f October 1, 2015) production from difficult fields won’t be viable. Around two dozen discoveries in KG Basin alone are languishing.

According to economic affairs secretary, Shaktikanta Das, the price for such areas will be based on average of landed price of naphtha, fuel oil and LNG (liquefied natural gas). At the prevailing price of these fuels, the price will work out to $6 per mBtu.

Are we then to infer that it is no longer concerned with what happens to fertilisers and power? An argument that they will continue to get gas from existing producing fields at low price of $3.82 per mBtu is untenable as those supplies being woefully inadequate, these industries will necessarily depend on supplies from the so-called tough fields.

An increase of $2.2 per mBtu in gas price will increase production cost of urea by about $52 per tonne or ₹3,550. This will lead to corresponding increase in subsidy as the government has no plans to increase its MRP in the next 3-4 years (having kept it frozen for nearly one-and-a-half decade). At the same time, the fiscal consolidation road-map will force it to rein in subsidy. How will it resolve the dilemma?

And, what happens to the ‘nascent’ industry argument? Apart from gas producers exploiting users, the government is giving the former an artificially higher price based on un-related fuels viz., naphtha, fuel oil. Globally, gas price is benchmarked to crude oil, or on its own terms as in West Asia (in Iran, India is negotiating for a price of $1.5 per mBtu for a urea JV in Iran). Within India too, it said ‘goodbye’ to those fuels long back.

What is the guarantee that higher price will give us more gas? What happened to high profile private oilfields should serve as a warning.

The government should recognise that the present policy regime is attractive even without pricing freedom. producers should focus on maximising output while keeping gas price at level affordable to major users like fertilisers and power.

The writer is a policy analyst