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 wells (also described as ‘hoarding’ of gas), latter maintains that this was due ‘geological’ factors hence, beyond control.
MPNG imposed a penalty initially for around US$ 1 billion (in July, 2013) subsequently raised to US$ 1.9 billion for failure of RIL to meet its supply commitments. The operator contested this imposition and matter is now under arbitration.
There was also a strong feeling within Government especially Finance Ministry that RIL should not be granted benefit of price hike till such time it fully makes up for shortfall. In other words, it should continue to get only US$ 4.2 per mBtu from April, 2014.
RIL contested this too on same ground viz., reduction in supply was due to factors beyond its control; that it did not indulge in hoarding hence, denial of hike in price is un-tenable. Whether, it hoarded or not is now a subject of investigation.
Till investigation is completed, for the interim, Cabinet has approved an arrangement under which RIL will get higher price of US$ 8.4 per mBtu subject to its furnishing bank guarantee. The guarantee is intended to cover the differential in price.
In case, investigations establish that RIL had indulged in hoarding of gas then, guarantee amount would be en-cashed. Finance Minister had mooted depositing money in an ‘escrow’ account; but this is not reflected in Cabinet decision.
The guarantee amount of US$ 147 million every quarter has been computed on the basis of 10 mmscmd gas supply. This works out to around US$ 600 million per annum.
Government is acting with alacrity to accommodate the interest of a contractor who has reneged on its commitment to supply gas; a violation that has caused gargantuan loss to user industries which will continue in future on a bigger scale.
Fertilizer industry needs around 47 mmscmd. Of this, it gets 16 mmscmd from ONGC/OIL. It was to get balance 31 mmscmd from KG-D6. However, supplies were progressively reduced to 10 mmscmd and now have totally dried up.
Since, LNG import is at 3-4 times extant domestic price of gas, to meet entire shortfall of 31 mmscmd, fertilizer industry will have to shell out Rs 45,000 crores annually. Given the fiscal binge, it cannot even hope get recompensed through higher subsidy.
Some 25 power projects were to get about 30 mmscmd from KG-D6. Supplies to these plants too have scratched the surface. The gas based power plants are operating at a measly PLF (plant load factor) @ 24% thanks to nosedive in gas supply.
Ratnagiri power project (erstwhile Dabhol) is on the verge of turning in to NPA (non performing asset) due to supply reduced to below 1 mmscmd as against requirement of 8 mmscmd.
Has Government thought of compensating these industries for the losses they suffered in past? Will it consider using penalty of US$ 1.9 billion (assuming outcome of arbitration in its favour) to neutralize their losses? How does it intend to help them in future?
Immediately after Cabinet decision (June, 13) on doubling of gas price, Mr Chidambaram had promised to consider a special dispensation for fertilizer and power units. The intent was to ‘immunize’ them from price hike. That is forgotten!
Parliament’s Standing Committee on Finance had asked Government to do a re-think on pricing of gas emphasizing in particular, need for looking at cost of exploration and production. By any stretch of imagination, existing price of US$ 4.2 per mBtu is not a bottleneck http://www.thehindubusinessline.com/todays-paper/tp-opinion/gas-policy-from-one-mess-to-another/article5187565.ece
Government has simply glossed over recommendations of Standing Committee and gone ahead with 100% price hike based on Rangarajan methodology. No attempt is made to even address infirmities in formula e.g., including price of LNG supplies to Japan which includes a huge premium!
Assurance of full price US$ 8.4 per mBtu – for shortfall in supplies – by itself is a huge climb-down. Putting price differential in an escrow account too has been cleverly avoided. Worse still, Government is extremely generous in determining guarantee amount.
Reportedly, US$ 147 million every quarter is arrived at using supply of 10 mmscmd whereas, actual shortfall was substantially higher at 123 mmscmd during 2009-10 to 2013-14. This results in substantial under-statement. How much should RIL keep aside?
4 mBtu (million British thermal units) make up 1 mKcal (million kilo calories). One standard cubic meter equals 10,000 Kcal. Therefore, 1 mmscmd equals 10,000 million Kcal. @ US$ 4.2 per mBtu (8.4 minus 4.2), value of 1 mmscmd is US$ 168000 (4.2x4x10,000).
Annualized this translates to US$ 62 million (0.168×365). For shortfall of 123 mmscmd, total value of price differential is around US$ 7.6 billion. @ US$ 147 million every quarter, it will take 13 years to garner the entire amount!
Juxtapose all this benevolence showered on Team RIL with following. Initial target of production from D 1&3 was 40 mmscmd at cost of US$ 2.4 billion (2004). This was increased to 80 mmscmd at cost US$ 8.8 billion (2006).
The capability to deliver 80 mmscmd was assessed on basis of evaluation by reputed international consultants and independent examination by DGH. So, how come fields have gone completely dry and we can’t hope to get even 1 mmscmd?
Here, it may be worth noting that a consultant appointed by DGH has already testified that RIL has capability to deliver provided it drills. The latter has however, contested and would like assessment to be done by an international consultant.
Clearly, if India’s E&P for gas has suffered, the issue is not so much about pricing which is often made a whipping boy; it has to do primarily with the mess in our regulatory architecture and complete lack of accountability.
Government needs to clear this maze and as regards pricing, it would be far better to make it ‘market-driven’ than present convoluted administered regime that puts users on receiving end all through.