Prime Minister Narendra Modi has, for a long time, been a votary of natural gas grids of the type in Gujarat, and the same philosophy seems to have been reflected in the government’s approach towards fixing kerosene subsidies. As FE reported last week, instead of going in for a periodic cut in kerosene subsidies of the type the UPA did with diesel—the current kerosene subsidy is Rs 16.82 per litre—the government’s plan is to ensure that every household has an electricity connection and, once this is done, remove the kerosene subsidy. The logic, presumably, is that since households will now have access to more economical electricity, they will no longer need to burn kerosene lamps.
The logic is flawed since the bulk of the kerosene does not reach the poor anyway—the Economic Survey reckons that 41% of subsidised kerosene does not reach the poor; indeed, they have to buy back their allocations in the black market! Which is why, if prices are raised regularly while PDS leakages plugged—through Aadhaar-linked PDS shops or through Aadhaar-linked cash transfers—the poor will not even feel the pinch. Modi would do well to keep in mind that Atal Bihari Vajpayee raised kerosene prices from Rs 2.52 per litre to Rs 9.01 per litre during his tenure, and there was no protest—11 years after Vajpayee demitted office, prices are just Rs 15.24 per litre as compared to the subsidy of Rs 16.82 per litre.
While Modi would also do well to cut LPG subsidies regularly, there is fortunately an even quicker way to phase these out. And these are related to Modi’s gas grids. Today, in the major cities that have piped natural gas, the price of this gas is lower than the highly subsidised LPG. In Delhi, for instance, those buying piped natural gas for their homes do so at a price of $11.45 per mmBtu (for purposes of conversion, the dollar-rupee value has been taken at 62) once you take into account the calorific value of this gas. The same exercise for LPG works out to $11.1 per mmBtu in case it is subsidised and $15.1 per mmBtu in case the LPG is not subsidised.
The reason for this is simple. While piped natural gas is, as the name suggests, based on natural gas, LPG is derived from crude oil whose prices tend to be higher than those for gas. Do the same exercise for other cities (see graphic), and the numbers don’t come out any different.
Some will argue that setting up natural gas grids is very expensive and this needs to be factored in while making such a calculation. Of course, this needs to be factored in, and it is since the prices being used for piped natural gas in the graphic are retail ones that take into account both the cosst of the pipeline as well as the fat profit margins accruing to the sellers of piped natural gas. In the case of Delhi, for instance, the price at which the natural gas is sold to the company doing the piped gas is only $6.66 per mmBtu while the retail price is $11.45—the difference is the cost of the pipeline as well as the profit margin of the firms.
What’s interesting, in this context, is a recent Supreme Court judgment that says the Petroleum and Natural Gas Regulatory Board (PNGRB) does not have the power to regulate tariffs for city gas projects. This is important in the sense that, should the government decide to, correctly, amend the PNGRB Act to give the regulator this power—the SC ruling was based on what the Act said, not what was desirable for natural monopolies such as city gas—costs of piped natural gas can fall a lot more. Imagine that, you cut out the LPG subsidy completely and still lower the costs of domestic cooking gas—of course, this applies only to cities where the demand is large enough to justify setting up of gas grids; though if the demand for 2/4 wheelers running on compressed natural gas is taken into account, a lot more cities would look viable.
What’s stopping faster development of city gas networks, needless to say, is the poor availability of natural gas. If the same city gas companies had to buy their gas at $12-13 per mmBtu—which is what imports cost—their economics would change dramatically. They may still be viable but only if an empowered PNGRB was able to cut down on fat profit margins for city gas firms. In the case of Delhi, for instance, had the PNGRB order not been struck down, the pipeline tariff would only have been 60-70 cents per mmBtu—in other words, the cost of piped gas would have fallen hugely for households.
Which is why, it is odd that, though the government has been in power for more than a year, virtually no progress has been made in hiking prices of natural gas allowed for domestic producers such as ONGC and Reliance Industries Limited. Were gas prices to be raised to economic levels, to justify exploration in the country’s deep waters, certainly another 40-45 mmscmd of gas could be available in another year or two. Given that this gas exploration will require large sums of money to be invested—just RIL and its partners had committed to invest $10 billion over 2-3 years while ONGC’s likely investment in its KG Basin fields will be $6-7 billion—this would even boost investment and therefore GDP growth significantly. Perhaps the prime minister’s office needs to join the dots—the savings in LPG subsidies as well as the additional investment boost to the economy—and persuade the petroleum minister to quickly hike gas prices. In any case, if any meaningful progress is to be made in the next round of oil license auctions, getting to market prices is critical. Unless gas prices are very clearly linked to market prices it is unlikely too many global/ Indian majors will be interested in bidding for gas fields.