Great news on diesel, bad news on gas: Sunil Jain

Written by Sunil Jain | Updated: Oct 19 2014, 02:33am hrs
Natural gasGovt has removed Japanese gas prices from the equation, but that is not enough to explain the reduction from Rangarajan?s $8.4 per mmBtu to the $5.61 announced.
One all! Thats the score on the petroleum ministrys moves today. One goal by the ministry on diesel and one self-goal by ministry on gas pricing! Some scope left for an appeal on the self-goal though, since the finance ministry will get to decide on whether a higher price can be paid for deepwater blocks like those owned by ONGC and RIL.

Move to deregulate diesel long a good one and long overdue. Once diesel subsidy reached near zero a few months ago, the govt should have freed up diesel. This way consumers benefit immediately. But if oil prices go up, as they will at some point, oil PSUs and govt dont have to bear a crushing subsidy - was around Rs 63,000 crore a year ago. As in the case of petrol where prices move up and down in keeping with global markets, consumers will factor it in.

An associated benefit is that, with no subsidies on petrol and diesel, you can now expect private firms like Essar and Reliance to roll out their marketing outlets - in RILs case, the outlets were already there but were shut down years ago as the subsidy burden got oppressive.

The move on gas prices was expected, and is deeply disappointing, though there is some scope for change - thats why few oil companies will commit to a definite comment on todays Cabinet moves!

The government has removed Japanese gas prices from the equation, but that is not enough to explain the reduction from Rangarajans $8.4 per mmBtu to the $5.61 announced. Some changes done as far as US Henry Hub prices also is concerned - this was removed and substituted by Alberta prices.

Main thing, no matter what the government might say about how this is a fair price, no one will explore in the deep waters. So a lot depends on whether higher prices are given for deepwater gas, and thats where most of Indias gas is to be found. Some scope has been left for this. According to what has been decided, if a field is found to be unviable at $5.61 per mmBtu, the case will be thrown up to the finance ministry which will take a call on whether to allow an exception and, if so, of how much.

So this opens up a potential window for investors to still explore for gas in deep waters. Sadly, it keeps us in the license permit raj.

Forget Reliance, the question for government to ask is whether ONGC will explore for gas in the deepwater fields it has. Also, with these prices and no significant extra Indian production, India will have to keep importing gas. Those imports will take place at $11-12 per mmBtu. So who is the gainer The exporters from Qatar, thats who.

For Indian users, the result is clear - there will either be a shortage of gas or, as more imports take place, prices will remain high.

1-1 is not a winning score, but the match ends up a draw at least. In this case, the equalizing goal was a self-goal. Pity.

Sunil Jain is The Financial Express Managing Editor.