Pricing predicament

Written by Santosh Tiwari | Updated: Jun 20 2013, 06:44am hrs
What is the current and the projected demand-supply situation of gas

Power and fertiliser sectors will be the major demand drivers in the next five years. Gas consumption by the power sector is expected to rise from the current 61 mmscmd to 207 mmscmd in FY17 and that by the fertiliser sector from the current 37 mmscmd to 106 mmscmd by FY15. According to the Rangarajan panel, demand projections for these two sectors are highly price-sensitive. Total gas demand is likely to grow from the current 166 mmscmd to 466 mmscmd in 2016 in FY17. Against this, domestic gas supply is projected to rise from 124 mmscmd in FY13 to 209 mmscmd in FY17 and imported LNG supply from 63 mmscmd to 150 mmscmd. This implies about 100 mmscmd gap between demand and supply, in the best case scenario.

Which are our major domestic gas sources

Domestic gas is sourced primarily from nomination fields of ONGC and OIL and the joint venture fields operated by Reliance Industries (KG-D6), British Gas (Panna-Mukta & Tapti), Cairn Energy (Ravva) and Niko Resources. The balance demand is met through imports of regassified LNG (RLNG).

Is it possible to increase gas supply in a big way in the near future

The sector has its own difficulties. Long gestation periods of projects in the pipeline requiring huge investments and inadequate capacity of LNG terminals are the major impediments. It will take at least 5-10 years for a discovery to reach production stage. It is quite likely that over the next five to seven years, the Indian gas market will move towards a situation where it will be distributed among a few sellers, with a huge demand-supply gap. This makes pricing of gas is a critical factor for enhancing domestic production.

How is gas pricing done

Broadly, there are two pricing regimesone for gas priced under the Administered Pricing Mechanism (APM) and the other for free market gas. The APM gas price currently is $4.2 per mmBtu. The free gas category includes domestically produced gas from New Exploration Licensing Policy (NELP) and pre-NELP fields. Under NELP, gas pricing has been formally approved only in case of RILs KG Basin gas discovery for which the price has been fixed at $4.2 per mmBtu for five years ending March 2014.

What can a revision in gas pricing do to help here

The projects bound by production sharing contracts (PSCs) including RIL's KG-D6 are governed by the price fixed by the government according to the contract. This is $4.2 per mmBtu in case of RIL and is seen as a benchmark of current gas pricing. The argument in favour of hiking gas price to a higher level is that it will help raise production levels and attract further investments, as the current price is working as a disincentive, making gas exploration and production an unattractive business proposition.

What is the government trying to do currently

The government is in the process of taking approval from the Cabinet Committee on Economic Affairs (CCEA) for hiking gas prices to a level which facilitates further investment in the sector. As Prime Minister Manmohan Singh wants a quick decision on this issue, it can come any time now.

Why is the decision taking time

There is a difference of opinion among the ministries concerned, especially the petroleum ministry and the finance ministry. While the finance ministry is pitching for a bigger hike to attract investments, the petroleum ministry favours a lower raise.

Who is supporting what price

The Rangarajan panel has suggested that the price be hiked from $4.2 to about $8.2, while the petroleum ministry wants to keep it at $6-6.5. The finance ministry and the Planning Commission are in favour of raising prices even beyond the panel recommendation.

What is the industry demand

The industry feels $8.2 is insufficient to meet the investment requirements for gas exploration and production. It has pitched for $10-12.

Who will be the ultimate beneficiaries of a gas price hike Is it correct that the price hike is being done to help only Reliance

There is no doubt that a higher price will help RIL raise gas production from KG-D6. However, this can't happen now. The gas price hike decision will be applicable only to forthcoming projects. The new gas price decided by the CCEA will be applicable for Reliance only from April 2014 after its current contract ends. According to petroleum minister M Veerappa Moily, the new price will help public sector companies in a big way.

Why are the Left parties up in arms against the petroleum minister

The Left parties have alleged that petroleum minister Veerappa Moily is pushing for a gas pricing decision now to help Reliance, a charge which Moily has rejected saying the decision would bring clarity and transparency into the sector and also help companies plan future projects with certainty.

What is the period for which the gas price decided by the CCEA will be applicable

The price will be in force for the whole of the 12th Plan period till FY17. After 2017, the government has planned to go by the pricing formula to be suggested by the Kelkar committee.

How will the government solve the issue of gas allocation to different sectors in this backdrop

The petroleum ministry has circulated a proposal for prioritisation. The proposal aims at balancing the needs of the gas-based power projects and the fertiliser units. The ministry is waiting for the response from the finance ministry and the Planning Commission, after which it will be taken to the empowered group of ministers for approval.