Experts deflate Arvind Kejriwals logic to lower gas prices

Written by Pranav Nambiar | New Delhi | Updated: Feb 15 2014, 07:15am hrs
Gas pricesGas prices are a function of production-sharing contract norms that have legal sanctity and demand-supply dynamics. Reuters
Not just Canadian explorer Niko Resources, which sells gas from its onshore fields in Bangladesh at $2.34 per million metric British thermal units (mmBtu), even India's very own ONGC has cost of production across blocks at $3.7/mmBtu.

However, contrary to what the Delhi government believes, that doesn't build a case for putting on hold the implementation of the Rangarajan panel's proposal to align the price of gas in India with chosen global benchmarks, which means doubling the price from the present $4/mmBtu effective April 2014.

Gas prices are a function of production-sharing contract (PSC) norms that have legal sanctity and demand-supply dynamics.

The gas from Bangladesh available at $2.34/mmBtu is produced from onshore fields west of Dhaka that have a significantly lower cost of production compared with deepwater blocks like the KG-D6 fields (where Reliance Industries and Niko are partners). Former ONGC chairman RS Sharma said that cost of production of gas varies from country to country and, therefore, drawing comparisons with Bangladesh is pointless. In the case of Saudi Arabia, he noted, gas production costs as low as $1/mmBtu and around $2/mmBtu in the US.

Sharma said Delhi CM's demand to lower gas prices violates the sanctity of the PSC, which calls for an arm's-length pricing with the approval of the government. The reputation of India amongst foreign investors would be at stake (if the price hike plan is abandoned), he said.

The various types of gas resources available in India, including onshore,offshore shallow, offshore deep and offshore ultra deep, have distinct commercial thresholds.

A report by consultancy firm IHS-Cera notes that only a very limited amount of deepwater finds in India are economic even at $8/mmBtu. A price of $10/mmBtu and above is required to develop most of the deep water, ultra- deepwater and technically challenging shallow water finds.

The report adds that at the domestic price of $8/mmBtu, India will be importing about 68% of gas while at around $12/mmBtu the import dependence will come down to around 24%, a huge boost for the energy sector where the gap between demand and supply is constantly increasing.

A senior ONGC official told FE that rather than having one price tag for gas produced from all the blocks, a differential pricing mechanism will be more feasible. "The $8/mmBtu price is good for deepwater blocks, but anything less than $5.85-$6/mmBtu is not viable for shallow water blocks. However, $4.2 is a good enough price for onshore blocks," he said.

Sunjoy Joshi, director of the Observer Research Foundation, feels that it would be ideal to allow market forces to determine prices. "Since it takes at least five years after discovery to start production, fixing prices well ahead of time is counterproductive in a dynamic sector.

Analysts say that if India has to encourage more investments in exploration activity and secure its energy security, it is vital to raise prices above the $4.2/mmBtu level.

With dwindling production in India, the country has now become increasingly reliant on gas imports and is expected to become a net importer soon. The cheapest international source of gas that sells at $2-$3/mmBtu in the local US markets will end up at a landed cost of at least $11-12 in India, higher than what the Rangarajan panel has recommended. Spot and short-term LNG prices hover in the $18-19/mmBtu range.

Experts say that there are enough buyers at higher prices from a range of sectors including steel, LPG, auto components, glass and petrochemicals.