Natural Gas Price Hike: दिन दहाडे डकैती.

The Current Account deficit (CAD) is showing signs of moderation presently, and finance minister, P Chidambaram, is crowing that current financial year would show great reduction in CAD when compared to last year. Yet, fiscal deficit (FD) is signalling worrying upward trend. The first two months (April-May) of current financial year have already logged 33% of the budget estimate of FD for full year, and the government would have to either augment revenues or tighten the belt on expenditure to stay the budgeted course. However, Petroleum Ministry announced on last Thursday a controversial and contentious hefty rise in the domestic natural gas price to double it from US$ 4.20 MMBtu to US$ 8.40 MMBtu. That had a euphoric effect on Bombay Stock Market’s Sensex on Friday when price of Reliance Industries (RIL) shares jumped handsomely to welcome this windfall bonanza. This did earn a respite of dubious value to the government worried over falling Rupee. Reliance has been seeking just such hefty rise for long claiming that capital expenditure required to augment *dwindling production* in KG basis would make its operations unviable without such increase. The Controller and Auditor General (CAG) had said that RIL is gold-plating its capital expenditure so as to reap this bonanza. The CAG’s demand to audit the *performance and exploration spending* in the Krishna-Godavari block operated by RIL met with stout resistance from both the company as well as the political executive. Petroleum Minister Veerappa Moily, who is a literature of not inconsiderable means, spun a specious yarn that the government is under tremendous pressure from formidable oil and gas import lobby to not increase price of domestic natural gas. Why? If price is increased, then domestic production of natural gas would boom; and with that would go the profits and influence of import lobby as India would kick significantly its addiction to imports. Finance minister chimed in that it would vastly encourage Foreign Direct Investment (FDI). Nice fairytale? Yes!, is the answer, but before that one must also keep in mind another *unexpected threat*. Considerable domestic production of natural gas goes to meet the needs of fertilizer and power industries. The former is the beneficiary of fertilizer subsidy and the latter is burdened by almost unserviceable debt. The increase in price of gas would only worsen the situation for both, and thereby would balloon the fiscal debt. Would that help FDI?
The Hindu has carried an excellent article by Surya P Sethi on this subject: Of Reliance, by Reliance, for Reliance: “The government has used fallacious arguments to double the price of gas and hand over windfall profits to India’s richest company”. Article is cogently argued and one is sure that it comes from a person who knows well what he is talking about. Yet, for those, who care more who said it than what is said, the author is former Principal Adviser, Power & Energy, Government of India, and is Adjunct Professor, Lee Kuan Yew School of Public Policy, National University of Singapore. The importance of this article is multifold in view of issues discussed earlier. Therefore, I quote the article in full below.
Hans Christian Andersen’s story about the emperor’s new clothes came to mind as I read the Finance Minister’s justification of the totally indefensible hike in India’s wellhead price for dry natural gas. The absence of any evidence-based research backing key economic decisions is the true “economic reality” of India, which is today the only country in the world that sees no difference between the wellhead price of natural gas and the price of liquefied natural gas (LNG).
The core argument being presented is that the higher price will yield higher upstream investment in untapped hydrocarbon frontiers, resulting in higher output of domestic natural gas and the reduction or even elimination of India’s import dependence on even costlier LNG, thereby improving the country’s fiscal stability and energy security.
Unfortunately this argument is fallacious on several counts.
Decline in output
First, the government itself admits that despite raising the domestic wellhead price of natural gas by almost 300 per cent from as low as $1.79/MMBtu to as high as $5.25/MMBtu, investments in the sector and the country’s gas output have actually dropped. The bulk of this drop is because of Reliance Industries Ltd (RIL), the company whose demands triggered the recent price increase. The Comptroller and Auditor General report explicitly outlines how RIL reneged on its production commitments while gold-plating its investments. Can the government guarantee that a price of $8.4/MMBtu will raise gas availability?
What if history repeats itself and it does not? Will the government then find more ways to raise prices even further? How long will the government wait to do so? Does it have a long-term vision based on geopolitical developments in the energy sector, especially gas, where Canada and the U.S. are poised to become major LNG exporters?
Significantly, the single largest instance of foreign direct investment that the above cited 300 per cent price increase attracted was BP’s acquisition of a 30 per cent stake in RIL’s declining KG basin play and not in any new greenfield frontier. BP is not known to invest $7 billion-plus for improving a country’s fiscal or energy balance. The company must have seen returns from a known discovery even at the then approved price of $4.2/MMBtu.
Second, the import parity price for a globally traded commodity such as crude oil (unlike natural gas) that has justifiably been in place since the 1990s has not succeeded in raising domestic crude production significantly or attracted significant FDI in the Indian sedimentary basin. Here too, the single largest investment was the purchase of a foreign company’s stake in an existing on-shore field in Rajasthan.
Finally, and most importantly, even if the government is right; what is the justification for raising the price of gas from existing fields? We can always pay a higher price for more difficult horizons provided the duly approved and audited costs of exploration and production warrant that. The current production was realised with no prospect of getting $8.4/MMBtu. Will the government spell out its plan for this windfall profit it is bequeathing to current producers at the cost of the common man and honest taxpayers?
It has been argued that the bulk of the benefits from the price hike will go to the public sector. However, we all know that the upstream public sector companies are milked by the government through ad hoc burdens such as funding under-recoveries. Hence, the real beneficiaries will be private gas producers unless the government also announces policies that place the same burdens on upstream private and public sector companies. But that would defeat the real purpose of the price increase, wouldn’t it? A bogey used to milk the upstream public sector is the absence of profit-sharing in the nomination blocks that they received in the pre-NELP era. It would be educational for me and others if the government would make public the exact amount of profit gas and profit oil that it has received from private producers since the New Exploration Licensing Policy was instituted.
In any event, the entire fairy tale of fiscal stability has now been undermined by none other than the Finance Minister himself. In his press briefing on Friday, he opened the door for subsidising the purchase of gas for the power and fertilizer sectors that together use over 75 per cent of the available gas in India.
Cheating & double-cheating
Like the $4.20/MMBtu price the last time, I am intrigued by the choice of the number $8.40/MMBtu this time around. In everyday language, these numbers are used to signify cheating and double-cheating! The price of 4.20 was derived based on a RIL formula that had never been used and is still not used anywhere in the world to price natural gas at the wellhead or any other form of gas anywhere. The 8.40 number reportedly flows from the Rangarajan formula, which again is not used anywhere else in the world to establish the wellhead price of natural gas or any other form of gas anywhere.
Can the government identify even a single gas field in the world that gets a well head price of $8.40/MMBtu for conventional dry natural gas? How come investments keep taking place elsewhere without resorting to such dubious pricing formulae? Can Dr. Rangarajan identify which element in his formula represents the wellhead price for dry natural gas actually received by conventional natural gas producers around the world? The truth is that none of the elements in the Rangarajan formula represents the wellhead price it sets out to establish, and yet it magically delivers a price at exactly twice the 4.20 level! The Henry Hub spot price (currently at $3.77/MMBtu), which is the only relevant element in the Rangarajan formula, is also greater than the wellhead price received by producers of conventional dry natural gas in the U.S.
‘Gigantic scam’
Strong words are typically not in my vocabulary so let me simply say that I agree with Gurudas Dasgupta, MP, that a “gigantic scam” is being perpetrated on the impoverished people of our country.
I also agree with former Union Revenue Secretary E.A.S. Sarma’s assertion that the gas price hike is a policy initiative that “socialises costs and privatises profits.” Let us not forget that the same KG basin gas that was once offered to NTPC at $2.34/MMBtu for 17 years and which is documented to cost under a dollar per MMBtu to produce received $4.20/MMbtu in the first five years and is now guaranteed to receive twice that or more in the next five years. This is the road to wealth in a country wherein some 80 per cent of the people live below the $2/day purchasing power parity threshold.
I urge the non-Congress leaders to join hands with Mr. Dasgupta in stopping this loot. Perhaps the Supreme Court, that placed very clear responsibilities on the government while pronouncing its judgment on the gas dispute between the then warring Ambani brothers, will take note of what is going on, especially in light of the CAG’s findings on the KG basin. Let me add that if indeed India is floating on natural gas, raising the wellhead price of dry natural gas to levels unheard of anywhere else in the world is the worst policy option to release this national wealth. Such an option works best when reserves are limited and producers gold plate their investment to extract the much needed energy at higher and higher prices to achieve the investment multiples that current policies guarantee — just as the CAG discovered in the case of KG basin.
In closing, let me inform the honourable Petroleum Minster that everyone related to the hydrocarbon field in India knows that I do not represent any lobby — not even the oil and gas import lobby that our Petroleum Minister seems to have inside information on. My old and new clothes do not come from any vested interest, blandishment or deception. Can our emperors make the same claim?
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