The Government needs to re-look at the current pricing scheme for CBM production as it is not reaping returns. It must, instead, stick to extant formula-based guidelines
The Cabinet Committee on Economic Affairs (CCEA) has approved marketing and pricing freedom to contractors/producers of coal-bed methane (CBM), or natural gas from coal seams, to sell it at arms length price in the domestic market. To discover arms length price, a contractor has to now follow a fully transparent and competitive bidding process from amongst users “with the objective that the best possible price is realised for the gas without any restrictive commercial practices”.
This decision has come in response to a scenario, whereby producers such as, Reliance Industries Limited (RIL) and Oil and Natural Gas Corporation (ONGC) etc, do not find CBM production to be viable under the existing pricing guidelines. Of the 33 CBM bearing blocks awarded so far, gas is being produced from only from four blocks, with a combined output of 1.17 million standard cubic metres per day (mmscmd). The producers exude confidence that freedom of pricing and marketing under the new policy will reverse this trend and help quickly ramp-up CBM gas production to targeted 5.77 mmscmd within a year.
A few months back, the Government had allowed pricing and marketing freedom in respect of gas produced from small and marginal discovered oil and gas fields (a total of 67 earlier given to ONGC and Oil India Ltd, on nomination basis in the 90s, which they surrendered to the Government). The fields were recently auctioned to promising investors. This too was rationalised on the basis that under extant pricing dispensation, production from these won’t be viable.
Earlier, in March 2016, the Government had given an “incentive” price for gas produced from deep water and ultra-deep water and high pressure-high temperature (HPHT) areas (for example, KG-DWN-98/2 of ONGC), using a formula-based on price of alternate fuels viz, fuel oil, naphtha and imported liquefied natural gas (LNG). That price was almost double of the price determined under extant guidelines.
So, what is wrong with the existing formula, which prompted the Government to grant differential policy dispensations for gas coming from different sources/fields? Or, is it the case that the Modi regime is being bullied by interest groups to somehow get away with price higher than under formula-based pricing?
Under the extant guidelines for pricing of domestic gas in vogue from November 1, 2014, the price is based on a weighted average of prices at four global locations viz, Henry Hub (the US), National Balancing Point (the UK), Alberta Gas Reference (Canada) and Russian price for a full year, three months prior to the effective date for revision. The price is revised bi-annually (once in every six months).
The clamour for market-driven pricing now may sound attractive to producers as this will give them an opportunity to charge more than under the formula-based pricing. But this will be seriously detrimental to users, especially sensitive sectors like fertiliser and power, which consume bulk of gas supplies and cannot afford to pay high price (their end users being poor farmers and households). Any attempt to gain at the cost of major consumers will be counter-productive.
A caveat that the producer will need to go through a transparent and competitive bidding process, to discover the so-called ‘arms length price’ is of no help. This is because, in a scenario of acute shortage of gas and demand being much higher than the supply, the bidding process will inevitably lead to an exploitative price. Even the alternative of import won’t be of any help as the infrastructure for handling at port, transportation and distribution, is with a handful of public sector undertakings.
The CoS was well aware of this when it rejected this approach and, instead, recommended a formula-based pricing. Nothing has changed since then to warrant a re-look at the pricing methodology. In fact, the supply scenario has only worsened with several fields in the Krishna Godavari basin, off the Andhra coast, showing much lower reserves than the quantum initially estimated.
The Government should stick to extant formula-based guidelines of November 2014, which was robust enough to help them reap handsome return even from difficult fields.
(The writer is a policy analyst)
http://www.dailypioneer.com/columnists/oped/raising-issues-with-gas-pricing-policy.html