The India Blog The India Blog is about the socio-political-economic landscape of the country, its cultural moorings and the challenges it faces – whatever affects the lives and future of the people living within its boundaries and beyond. Understanding the natural gas price hike in India by Siddharth Singh Wednesday, February 12, 2014 at 15 : 58 Delhis Chief Minister Arvind Kejriwal announced that the Delhi state government is filing a First Information Report (FIR) with the police against Indias current Oil and Natural Gas Minister Veerappa Moily, former minister Murli Deora, and the Chairman of Indias largest private sector upstream oil and gas company, Reliance Industries Limited (RIL), for alleged irregularities in pricing of natural gas in KG basin. Kejriwal alleged that RIL will benefit as the Ministry of Petroleum and Natural Gas (MoPNG) decided to hike the natural gas price which will come into effect on April 1, 2014. Prices are set to rise to USD 8 per million British thermal unit (mmBtu) as against current USD 4.2/mmBtu. Fuel prices are emerging to be an important political issue as over the past few years. As I wrote elsewhere (click here to read), political workers at the grassroots are complaining about the frequent fuel price hikes. In this election year, politicians will bring this issue to the forefront. But does such protest and action against the natural gas price hike hold merit? Why are these prices being hiked in the first place? Currently, prices are either set under the Administered Pricing Mechanism (APM) regime, or determined by markets, especially in the case of Liquefied Natural Gas (LNG) imports. (Note that LNG and natural gas are two terms for the same fuel in different physical states). Prices are also determined under domestic exploration contracts between the government and the oil and gas exploration and production (E&P) companies. Between 2005 and 2010, APM prices were not revised, thus leading to large subsidy burdens on the central government. In 2010, gas prices were increased from USD 1.7/mmBtu to USD 4.2/mmBtu. Currently, prices of gas as determined by domestic contracts and by long-term import contracts of LNG vary significantly, from as low as USD 2/mmBtu to as high as USD 19.25/mmBtu. Clearly, there is no single, unified gas market in India and therefore no single market-driven price. In 2012, a committee chaired by C. Rangarajan, the Chairman of the Prime Ministers Economic Advisory Council recommended changes to the production sharing contracts between the government and E&P companies. In order to facilitate greater transparency in the cost and revenue accounts of companies, the committee proposed moving away from cost-recovery to revenue sharing agreements. As a part of this reform, a new gas price forming mechanism was suggested. As per the new Rangarajan Formula, natural gas prices will now be derived from the average of LNG import prices into India (based on long term contracts) and from prices of natural gas at trading hubs in US, UK and Japan. These prices will be reviewed and revised quarterly and would apply to all pricing decisions made in the future. To begin with, this would mean a price of USD 8/mmBtu starting April. This price would apply equally across all sectors regardless of their prioritization for supply as per the Gas Utilization Policy. Do note here that in the past few years, there has been underinvestment in the E&P sector in India with a few E&P companies exiting the sector. As a result of this, around 25% of Indias natural gas consumption currently is met by costly LNG imports, and this number is expected to rise to 50% by 2022 according to the MoPNG. One of the key criticisms that this formula has attracted is it includes Japans gas import price, which currently at over USD 15/mmBtu is significantly higher than Americas natural gas prices, which have hovered approximately around USD 4/mmBtu in the recent past (Henry Hub prices). This makes the price determined by the Rangarajan Formula almost twice as high as the US prices. However, such criticism overlooks the fact that US produces much of the natural gas it consumes domestically, and is even all set to be a net exporter of gas by 2016. In particular, the recent shale gas boom has increased supply in the US. India on the other hand imports a significant fraction of its gas demand. Indias demand for LNG competes with Japans, which has shot through the roof recently as it has decided to move away from nuclear sources of energy to gas (this has been termed the post-Fukishima squeeze). Other major LNG consumers in Asia are Korea, Taiwan and China. This is the reason why the Rangarajan Formula price in India is not as low as the prices in the US, but at the same time not as high as in Japan which almost entirely relies on imports. Additionally, natural gas unlike oil is trickier to transport, especially across seas. Gas has to be liquefied and then re-gassified at port terminals, which significantly adds to the cost of natural gas. The Rangarajan Formula prices seek to bring price clarity to encourage E&P activity. They also seek to remove the arbitrariness of the prices as determined by the APM. However, these prices may have an undetermined impact on the subsidy bill. On the one hand, fuel subsidy may reduce, but on the other hand, the central government may end up spending more on fertilizer subsidies. Of course, natural gas can still be subsidised for the poor at the point of consumption, although the government will have its task cut out to identify and target such subsidies. Blanket subsidies which are currently in place are easier to implement but lead of inefficiencies and large subsidy bills. However, clearly, the price reforms are being seen with a suspicious eye by commentators and politicians alike, especially in this election year. What the truth behind the alleged price irregularities between RIL and the MoPGN will be found out by relevant authorities over time, but it is a fact that the ministry and RIL have been at loggerheads over the past few years over the latters low KG-D6 block natural gas production. Note that the allegation is that RIL has deliberately kept production low so as to make a windfall when prices rise and production is increased. The MoPNG recently imposed a penalty of USD 792 million on RIL for missing the target for production of natural gas, taking the total fine imposed on it since 2010-11 to USD 1.797 billion. The MoPNG also directed RIL to relinquish 80% of this block, including five discoveries, for failing to adhere to development timelines. Much of this is being challenged by the RIL, and the Supreme Court is yet to give its verdict on this case. But all said and done, the lack of communication by the UPA will haunt it over the fuel price issue. No senior leader has bothered to consistently explain to the public the need of a revision of prices and the reduction of fuel subsidies. Unsurprisingly, the gas price hike issue will be taken advantage of by politicians hoping to make gains this election year. What the truth behind the allegations of irregularities are, however, only time will tell.
Posted on: Tue, 25 Mar 2014 11:43:51 +0000
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