Fertiliser, power units may get some gas relief

Written by fe Bureau | New Delhi | Updated: Jun 29 2013, 09:58am hrs
Finance minister P Chidambaram on Friday said Thursday's Cabinet decision to double the price of gas could be followed by an effort to moderate input costs of power and fertiliser units. This has caused some analysts to speculate that the minister might be hinting at a small subsidy component financed out of incremental government revenues from the price hike, estimated at close to $2.5 billion by some.

Official sources, however, told FE that no such mechanism was being considered, but said that a plan was before the Cabinet to apportion of the cost of expensive liquefied natural gas imports equitably between various consumers depending on their ability to put up with cost hikes. Even though it is certain that the revised gas price effective for five years from April 2014 would encourage domestic investments and ramp up output, a certain quantity of LNG (which is more than three times costlier than the domestic gas at the current price of $4.2/mmBtu) would still need to be imported. With many gas-based power plants coming up, there might be a need to share the pain (of LNG imports) equally, said a senior government functionary.

Explaining why the gas price hike was imperative in the wake of a decline in domestic investment in exploration and production and drawing attention to the rising demand-supply gap and $27-billion investments abroad by Indian firms over the last decade, Chidambaram said: "We can look at fixing the input costs for these (power and fertiliser) sectors. The issues will be addressed in the course of time." He did not elaborate. Due to the lack of remunerative prices, no investment has been made in domestic exploration and production, resulting in a fall in natural gas production from 143 million standard cubic metres per day in 2010-11 to 111.44 mmscmd in 2012-13, the finance minister said.

The power and fertiliser sectors consume almost 80% of the gas produced in the country. In the meeting of the Cabinet Committee on Economic Affairs, the power ministry had pitched for gas price to be not more than $5/mmBtu. The approved price would impact the power sector by about Rs 46,360 crore annually.

The fertiliser ministry was not comfortable with a gas price hike to over $6/mmBtu as arrived at by the Rangarajan panel and now approved by the Cabinet would raise the fertiliser subsidy burden by Rs 16,992 crore annually.

We are fully conscious of the issues raised by the power and fertiliser sectors but the case for increasing domestic gas prices is compelling, Chidambaram said.

I feel power sector units could be allowed a pass-through of higher cost of gas or there could be some adjustment in the price of electricity, Prime Minister's Economic Advisory Council chairman C Rangarajan said, adding that the burden on the sector should not be much as gas still accounted for roughly 10% of the thermal power produced in the country.

As per an estimate, a $1 increase in price generates close to $500 million for various stakeholders. While one-third of this goes to the producing company, about 15% goes to states in the form of royalty and the remaining is the central government's revenue that by way of profit-sharing and different taxes. If this incremental earning of the government is used for deciding the right input price for power and fertiliser sectors, the burden on government finances would be minimal, said a power sector expert.

Defending the government's decision to raise gas prices, Chidambaram said that the government simply did not have the money to allow for expensive import of LNG to meet domestic fuel requirement and the choice was only between living without gas or increasing its production. Domestic production can be increased only if investment is made. This is not being made at present. The gas price revision would help us to get necessary investment from domestic and international investors, he said, adding that the government has bitten the bullet and taken hard decisions.

The new gas price will apply uniformly to all producers, be it state-owned ONGC and Oil India and private sector major Reliance Industries. In a note, Morgan Stanley analysts wrote: "We project upside of 39% for ONGC and 20% for Reliance for our FY 2015 earnings estimates. At constant currency, we estimate the earnings upside at 26% for ONGC and 4% for Reliance."

ONGC expects to add about Rs 8,400- 8,800 crore in profits annually thanks to the hike in gas price.

The Rangarajan formula uses long-term and spot liquid gas import contracts as well as international trading benchmarks to arrive at a competitive price for India. However, the CCEA tweaked the formula to price the gas at an average of the long-term LNG price and international trading benchmarks by removing higher spot prices.

Increasing gas prices had become imminent as investment in the upstream sector declined from a level of $6.6 billion in 2007-08 to just about $1.8 billion in 2011-12 while import of expensive LNG increased from a level of 38 mmscmd in 2011-12 to 50 mmscmd in 2012-13. Chidambaram said at current level of imports this would increase to 234 mmscmd by 2016-17.