The Government has given Reliance a pretty long rope, despite its inability to meet its production sharing contract (PSC). This has led to fertiliser and power companies being badly hit for no fault of theirs. Will these companies be compensated for losses? First, for some background on how the PSC came unstuck. In June, 2013, Cabinet had decided to double price of domestic gas from $ 4.2 per mBtu to $ 8.4 per mBtu from April 2014, based on recommendations of a Committee under C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council (PMEAC). However, a notification was held back in view of a dispute with RIL-BP-Nikko, operating the D 1, 3 fields in KG basin. The bone of contention was...
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Category: Oil & Gas
Pruning LPG subsidy – one step forward, two steps back
UPA (United Progressive Alliance) Government always talks loud on economic reforms. However, it moves at a niggardly pace when, it comes to taking hard policy decisions. Moreover, there is no guarantee that it would stick to those decisions. A classic example is LPG subsidy. For decades, sale of LPG (besides diesel and kerosene) was subsidized under an administered pricing regime (APR) for petroleum products. Funds for subsidy came by way of revenue generated from sale of products like naphtha, ATF (aviation turbine fuel), fuel oil, LSHS (low sulphur heavy stock) etc at higher price. Essentially, this involved cross-subsidization by consumers of high end products like naphtha and ATF through what was euphemistically described as Oil Pool Account (OPA). OPA was...
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Hike in price of domestic gas – defaulter rewarded
In June, 2013, Cabinet had decided to double price of domestic gas from US$ 4.2 per mBtu to US$ 8.4 per mBtu from April, 2014 based on recommendations of a Committee under Dr C Rangarajan, Chairman, PM’s Economic Advisory Council (EAC). However, a notification in this regard was held back in view of a dispute with RIL-BP-Nikko operator of the D 1, 3 fields in KG basin off the AP coast. The bone of contention was a huge shortfall in supply of gas versus the committed quantity under the PSC (production sharing contract). While, Ministry of Petroleum & Natural Gas (MPNG) argued that this was due to a deliberate act on part of RIL not to drill required number of...
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Oil PSUs squeezed mercilessly
Despite all-out efforts to build indigenous capabilities in the energy sector for decades, India remains dependent on imports to the extent of 80 per cent for its oil needs. The Oil & Natural Gas Corporation — a central public sector maharatna company — currently produces about 30 million tonnes of crude oil or 80 per cent of domestic output. It has plans to invest Rs 11,00,000 crore ($177 billion) in oil exploration till 2030. That is expected to yield additional production of 60 million tonnes and should help in lowering import. Financing this gargantuan investment poses a huge challenge. All along, the Government had been goading profit-making central PSUs to fund their capital expenditure from ‘internal’ resources. Essentially, ‘internal’ resources...
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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...
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Running out of gas
In its meeting held on July 17, 2013, the Empowered Group of Ministers (EGoM) considered the ministry of petroleum and natural gas’ (MPNG) proposal to re-prioritise allocation of domestic gas from RIL’s KG-D6 fields ‘to treat power on par with fertilisers’. It was decided to retain extant top priority for the fertiliser sector for now. The fertiliser sector was spared the ignominy of snatching away its claim on gas not because members of the EGoM recognised its legitimacy. It was the fear of reduction in urea production due to curtailment in gas supply and the resultant shortage at the time of impending elections that drove them to maintain the status quo. Gas is a national resource and its use has...
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No basis to gas price hike
A unit price of $8 for gas allows for recovery of capital costs at levels of output – in other words, monopoly pricing. The Cabinet Committee on Economic Affairs has approved doubling the gas price from the existing $4.2 per mBtu to $8.4 per mBtu for all domestically produced gas. Applicable from April 2014, the revised price is based on a slight modification of the Rangarajan panel’s formula. The Cabinet took the decision despite strong opposition from two key Ministries viz., fertiliser and power. While the Power Ministry wanted price to be maintained at the existing $4.2 per mBtu, the Fertiliser Ministry was reconciled to $6.7 per mBtu mooted by the Ministry of Petroleum and Natural Gas (MPNG). Subsidy burden...
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Linkage with international energy price – ‘Duality’ syndrome
Recently, Dr Montek S. Ahluwalia observed that ‘8% growth in GDP can’t be guaranteed unless Indian product prices are linked to international energy prices’. There can be no dis-agreement on this especially in case of energy where our import dependence is above 80%. But, who will do it and when? Considering that all sources of energy supply have been under an administered/controlled price regime for decades, initiative has to come from Govt only. But, actions thus far fail to inspire! Naphtha, fuel oil & LSHS (low sulphur heavy stock) are used as feedstock & fuel in making of fertilizers. Fertilizers mainly urea, DAP & other complex fertilizers are used by farmers for raising crop yield. Under administered price regime (APR)...
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Debate – Should gas prices be raised as per Rangarajan plan?
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...
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Don’t play around with gas allocation
The woes of the fertiliser industry do not appear to be showing any signs of easing. Already battered by the financial squeeze, due to grossly inadequate Budget allocation, it may now face a huge shortage of gas. Gas is a ‘clean’ and ‘environment-friendly’ fuel. It is the most preferred feedstock for production of fertilisers. About 80 per cent of production capacity for urea in India is based on gas (balance 20 per cent on naphtha and fuel oil). Gas being a resource of national importance, the Central government allocates available gas to various sectors — fertilisers, power, petrochemicals, sponge iron, and household consumption. Historically, this job was performed by the Gas Linkage Committee (GLC) — an inter-ministerial platform chaired by...
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