In his budget speech for 2016-17, finance minister, Arun Jaitely lamented the situation of “rising demand, near-stagnation in production and consequent rapid increase in import” and argued that there was need to incentivize 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 4 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% 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 huge supply-demand gap, leaving producers free to charge market based price will lead to a sharp increase. Second, fertilizers 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 fertilizers and hike in power tariff affecting millions of consumers.
Until 4 months back, MOF was stuck to the above stance. What has prompted the finance minister change this? Have the concerns for fertilizers and power become irrelevant now?
Ever since the new gas pricing guidelines were put in force, the government is under increasing pressure from operators viz., Reliance Industries Limited [RIL], ONGC, Gujarat State Petroleum Corporation [GSPC] etc to increase the price citing that at existing administered price [currently US$ 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.
But, these facts were known all along and yet MOF continued to oppose until we see a reversal in budget speech. 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 prevailing price of these fuels, the price will work out to US$ 6 per mBtu.
If, the government goes ahead with this formulation, are we then to infer that it is no longer concerned with what happens to fertilizers and power. An argument that they will continue to get gas from existing producing fields at low price of US$ 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 US$ 2.2 per mBtu in gas price will increase production cost of urea by about US$ 52 per ton or Rs 3550. 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? Forget gas producers exploiting users, on its own volition, the government is giving them 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 as in middle-east [in Iran, India is negotiating for a price of US$ 1.5 per mBtu for a urea JV]. Within India too, it said ‘good bye’ to those fuels long back.
Finally, what is the guarantee that higher price will give us more gas. What happened to high profile KG-DWN-98/3 [better known as KG-D6] should serve as a warning.
Nearly a decade ago, it was assured US$ 4.2 per mBtu – a very good price [almost double of what was arrived at under competitive bidding for supply to National Thermal Power Corporation [NTPC]. Yet, its recoverable reserves [RR] came down from 10-11 trillion cubic ft [tcf] to 1.9 tcf [revised in 2012]. KG-D6 is slated to go dry within 2 years even at current measly production rate of 10 million standard cubic meter per day [mmscmd].
KG-DWN-98/2 [KG-D5] which ONGC intends to commission by 2018 has RR of only 0.5 tcf [as per De-Golyer and MacNaughthon] which @ 16 mmscmd will run out in 2 years.
The government should recognize that extant policy regime is attractive even without freedom of pricing. It should unshackle producers from all sorts of controls/approvals. The latter should focus on maximizing production which holds the key to making good profits even while keeping gas price at level affordable to major users like fertilizers and power.