A return to global market-based pricing of gas will hurt fertilisers and power. The Government must, therefore, reconsider its decision to raise the price of natural gas
In October 2014, the Modi Government had issued guidelines to fix the price of all domestic gas based on weighted average of gas prices prevailing in four international locations. This led to consternation among producers who say that, at existing administered price ($3.82 per million British thermal unit from October 1, 2015, which will fall to $3.15 in April), production from difficult fields won’t be viable.
The Government then promised to consider a ‘premium’ price for deep water blocs, ultra-deep water blocs, which present challenging geological environment. In May 2015, the Union Ministry for Petroleum and Natural Gas 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 per cent to 50 per cent, depending on the degree of toughness of the concerned field. However, the proposal was shot down by Union Minister for Finance Arun Jaitley.
In a change of heart, the Finance Minister, during his Budget 2016-17 speech, alluded to giving incentive to these areas. On March 10, the Cabinet Committee on Economic Affairs approved a policy in this regard. For such areas, which are yet to commence commercial production as on January 1, and for all future discoveries in such areas, producers will be allowed marketing freedom, including pricing freedom. However, to protect user industries from any market imperfections, this freedom was subjected to a ceiling price, based on landed price of alternative fuels.
The ceiling price is to be determined as the lowest of landed price of imported fuel oil; landed price of imported liquefied natural gas and weighted average imported landed price of substitute fuels viz, coal, fuel oil and naphtha (with weights of 30 per cent, 40 per cent and 30 per cent respectively) in preceding year, a quarter prior to the commencement of relevant pricing period. Thus, to arrive at price cap applicable to say from April 1, 2018, to September 30, 2018, prices for mentioned fuels will be for January 1, 2017 to December 31, 2017.
Using figures for January 1, 2015, to December 31, 2015, ceiling price comes to about seven dollar per mBtu (more than double the current domestic price from April 1). This is when crude price plummeted to a low of $30 per barrel. From 2018 onwards, when gas starts flowing from these tough areas, prices of fuel oil, naphtha and LNG (these change in tandem with crude) will be high. So, gas producers can hope for an even higher cap. Fertilisers and power alone consume over 75 per cent of the total gas and this position will hold in the future.
These are used by millions of poor farmers and households and to make them affordable, the Government controls their price/tariff at low level, unrelated to cost which is much higher. In fertilisers, the difference is subsidised by the Centre, whereas in power, States bear the brunt. The maximum retail price of urea, where gas-use is over 50 per cent of domestic output, is currently at Rs 5,360 per tonne (last year, the CCEA decided to freeze price at this level for four years). This price won’t cover production cost even at low gas price of three dollars per mBtu leading to high subsidy on domestic urea (Rs 38,000 crore in 2015-2016). At seven dollar per mBtu, the gap will increase leaps and bounds!
Will the Government keep shelling out more on subsidy? What appears to be an attractive policy for gas companies is inherently unsustainable. It is heavily tilted in favour of the producers, to the detriment of the users. How will the former survive if the latter cannot pay the higher price? This brings us to a fundamental question: Why do producers need higher price for tough fields? Their argument is that investment in developing deep/ultra-deep water areas is high and hence, there is a need for higher price to service it. But, an equally crucial fact is that these have much higher reserves than found in shallow water/on-shore blocs.
The resultant extra flow of gas will be more than the make up for higher capital spend. Clearly, it is the reserve and production which holds the key to viability of gas fields more so for deep/ultra-deep water. If producers manage these well, then even with low price they can generate a handsome revenue stream. If they mis-manage then, any price level howsoever high will be inadequate. The Government should reconsider its decision, as more than 100 per cent increase in price will prove to be disastrous for fertilisers and power, while there will be no guarantee that the country will get more gas.
http://www.dailypioneer.com/columnists/oped/why-this-price-rise-in-natural-gas.html