While a price hike to about $8/mmBtu from $4.2 at the moment will increase fertiliser production costs and subsidies, even this hike will not be enough to bring in new investments or prop up gas production from existing fields
Uttam Gupta
Gas is a natural resource which is ‘inherently’ more energy efficient. It is much cleaner and environment friendly and requires less investment, and is much sought after. It is also most preferred for production of fertilisers. About 80% of urea capacity in India is based on gas. The rest on fuel oil and naphtha is being switched over to gas. A spate of projects under new urea investment policy (UIP) are also based on natural gas. The viability of fertiliser plants depends on policy environment. The government controls MRP at a ‘low’ level, of R5,360 per tonne, and compensates them for excess of production cost over this as subsidy.
The bulk of domestic gas is supplied at $4.2 per mmBtu. At this price, the production cost of domestic urea is R11,000 per tonne. Hence, there is a subsidy pay out of R5,640 per tonne. The domestic production of 22 million tonnes is short of demand by 8 million tonnes. This is imported. The average cost of imported urea is R25,000 per tonne entailing R20,000 per tonne as subsidy (3.5 times subsidy on domestic).
Projects under UIP are meant to substitute imports and thus bring down overall subsidy. But Dr Rangarajan’s proposal to more than double gas price to $8.8 per mmBtu could be a spoiler. This will increase production cost by R6,325 per tonne and subsidy by R11,000 crore to existing gas-based plants. The impact will be close to R20,000 crore if entire consumption of 30 million tonne is met from gas-based capacity. The government wants to rein in subsidy too. It restricted payments to R65,000 crore in 2012-13 leading to a carry-forward of R35,000 crore. For 2013-14, the allocation is same as last year! It will only have R30,000 crore left for the current year.
Mr Chidambaram has drawn ‘Red Lines’ in regard to fiscal deficit right up to 2016-17. His big bet is on subsidies. But Rangarajan prescription will wreck his plans. If both stick out their neck, this will kill fertiliser industry!
The option of increasing MRP exists only on paper. Given political sensitivities and now election imponderables, the government can’t muster courage to increase this by even R50 per tonne, or 1%. Fertiliser gets top priority in gas allocation (Lovraj Kumar committee, 1976, and others); LPG is at number two and power at third slot. Fertilisers and power together take around 75% of gas. Yet fertiliser industry gets 75% of its current needs, the balance from LNG which costs 3-3.5 times more. There is no gas in sight for plants (five fuel oil and one naphtha) that switched over in 2012-13 and those proposed under UIP.
Of late, the power sector is seeking to get the priorities changed. A proposal before the EGoM is to treat it at par with fertilisers. If accepted, this will aggravate shortfall for latter and more LNG import at higher cost. Power tariffs for agriculture and households (HH) are upward inflexible. There are limits to what SEBs/discoms can charge from industries to cover increase in fuel cost and cross-subsidise agriculture/HH. SEBs/discoms have piled up huge losses of over R2,00,000 crore. The government may not call these subsidies. But it has to foot the bill. Rangarajan prescription will make matters worse. While deciding on gas price, EGoM should keep to forefront what major user industries—fertilisers & power—can pay. This depends on subsidy budget and MRP. If the government cannot raise the MRP of urea and yet wishes to hike gas price, then it must not put any cap on fertiliser subsidy. If it does cap, the acceptance of Rangarajan recommendations could threaten existing capacity and new capacity will not come.
The government should take a ‘holistic’ view of the three—gas, fertilisers/power and farmers. And, of course, ‘subsidies’. It can’t keep all happy and yet keep subsidy low. This may happen in dreamland, but not in reality. A practical and viable approach would be to remove control on urea MRP and make power tariff for farmers upward flexible. That can help in reining in subsidy and also arriving at a decision on gas price that satisfies all stakeholders.
Will that happen?
The author is a policy analyst and former chief economist, Fertiliser Association of India
Ashu Sagar
Natural gas can either be imported through a pipeline (PNG) or liquefied and brought in ships (LNG) or produced domestically (DNG). PNG has long gestation, usually 20-25 years. It requires a friendly intervening territory for pipeline security. On both eastern and western borders, our conditions are less than ideal. Near-term PNG is unlikely. LNG implies substantial costs for liquefaction, transportation and regasification. It is available but for a price paid in forex. The price runs around $14 and is likely to remain in $12-18 range over the next few years. We are short of DNG. Discovery in D6 flattered to deceive. Current domestic production meets only part of requirement and is declining. From where shall future gas come?
Unlike in the US, Indian shales are not prospective. The environment, land and water footprint for E&P is significant. These issues are socially important and politically sensitive. It is likely to take a long lead-time for inter-policy conflict resolution. India is not likely to have significant production from shale for another decade.
The future Indian DNG prospects are essentially in Deep Water and mostly for Non Associated Dry Gas (NANG) rather than gas associated with oil (ANG). In the last few years, the uncertainty of gas prices and allocation by the government, as against free market price at arm’s length contracted in NELP, has reduced interest in Indian upstream. The exploration activity has already gone down. NELP rounds have been a failure. Private sector has hardly drilled new wells. The government’s concern at declining interest in Indian upstream is visible in consecutive appointment of two committees under C Rangarajan and Vijay Kelkar to look at the issues and suggest the remedies.
An IHS-CERA study on India’s resource potential highlights that, at $8, onshore and some shallow offshore gas will be viable. Most of India’s yet-to-be-discovered gas cannot be commercially produced below $10. Substantial gas requires $12 or above to be commercialised. What then are the choices on the supply-side? Either larger imports of LNG with declining domestic production at lower price versus increasing domestic production with a higher price and better energy security as well as retention of money in domestic economy. Calculations show that the average price for consumer in either case is the similar. Free market price determined at arm’s length is the optimal and only prudent way to go.
The government may start from Rangarajan formula but must quickly move up to the genuine free market price. The government is contractually bound to it. Not honouring its contracts isn’t an option that a government can casually exercise. Reducing exploration is against national interests.
The implications of prices below Rangarajan formula will start hitting immediately. The relief anticipated from Deendayal, recent CBM and other discoveries shall start disappearing. Higher LNG share shall make the effective market price to consumers will go even higher than what they will pay with Rangarajan formula as the base. Forex issues shall become bigger. Risk capital inflow for exploration shall become dry. There shall be a loss to domestic economy and GDP. These are no idle statements. Already, significant exploration spends of Indian companies, in both private and government sector, have shifted overseas. They would rather explore overseas, convert gas to LNG and bring it to India at a profit than struggle in more difficult geology and operating environment for an uncertain and low price or allocation that tilts the field against them.
Consumers on demand-side having price restrictions on their end-products may have solutions in free market price for their products or direct subsidy transfer for social and political considerations, but fighting for reduction of domestic gas pricing isn’t one of solutions. Killing the goose that lays the proverbial egg isn’t going to resolve the problem.
The author is secretary general, Association of Oil and Gas Operators
Published at http://www.financialexpress.com/news/should-gas-prices-be-raised-as-per-rangarajan-plan-/1118828/0