TV anchors have a favourite question for panelists deliberating on the forthcoming budget: ?If there is one measure that you would like the finance minister to include in his budget speech, what would that be?? It is a sensible question, since it focuses the mind. There is never enough time for a rigorous debate on budgetary issues and most panelists have a proclivity to ramble. It is also a difficult question, for it pushes the respondent to disentangle the interrelated issues and prioritise. I have posed a variant of this question to myself for the purpose of this article. What is the one decision that the finance minister can announce with regard to the petroleum sector that will not upset the political applecart? I enter the caveat of politics because, without it, the answer would have to be one of either ?reduce subsidies? or ?implement GST?. Both are crucially important, but none pass political muster.
The subsidies on LPG, petrol, diesel and kerosene have to be contained if the FM is to balance his books. In 2011-12, for instance, the policy compelling oil marketing companies (OMCs) to sell below cost effectively drained the exchequer of approximately R130,000 crore. This estimate is premised on a crude oil price of $110 and an exchange rate of R49/$1. Given that the current price of Brent crude is hovering around $120/bbl and given that the Middle East is riven with tension (viz the Iran nuclear impasse), production has been cut back in Sudan, Yemen and Syria and Saudi Arabia has an effective surplus capacity of only 1.5 mbd, this price premise may well be too conservative. And, as such, the subsidy burden for 2012-13 could be higher. The FM is of course cognisant of the importance of aligning domestic prices to market levels, but his hands are tied by politics. The situation is no different for GST. Here, too, the FM appreciates the importance of streamlining the petroleum taxation structure through GST, but he is not able to do so because of the dynamics of Centre-state politics. Petroleum products consequently remain outside the ambit of GST. Given that both subsidies and GST fail the condition set out in my question, my answer is reduce the import duty on gas and grant the commodity ?declared goods status?. There are several reasons why I believe these two measures should find space in the FM?s budgetary text.
The first has to do with the worsening petroleum demand-supply balance. Currently, we import 80% of our oil requirements, but if one were to extrapolate from current trends, this dependence will rise beyond 90% by 2020. Moreover, the production of gas is fast declining. Reliance, for instance, was expected to produce approximately 60 mmscmd from its KG basin discovery and the allocation of gas had been made accordingly. But, in 2011-12 it produced only 43 mmscmd and now the ministry of petroleum has projected that supplies will come down to 28 mmscmd in 2012-13 and 24 mmscmd in 2013-14. Priority sectors like power and fertilisers that had been assured supplies are now scrambling to find alternative sources of fuel and feedstock.
This growing demand-supply imbalance raises important strategic questions. How best can we secure our future energy supplies? What must be done to guard against price and supply volatility? What policy changes are required to optimise the mix of imported fuels? These are difficult questions to answer, but I would posit that all responses should project a strong role for natural gas.
For a start, there is an abundance of gas within our geography. On our eastern border, there are Myanmar and Bangladesh with large reserves that have to yet be monetised. In the west, but further afield, Mozambique and Tanzania have made massive discoveries. Industry reports estimate the gas reserves to be between 50-60 trillion cubic feet, which, if correct, would be 4-5 times larger than that established in the Krishna Godavari basin. In the north/north west, the Central Asian republics of Turkmenistan, Uzbekistan and Azerbaijan (and of course Iran) are still looking to pipe gas into the Indian market. The point is that, unlike oil, for which we are overwhelmingly dependent on the Middle East, there are diversified possibilities for accessing gas. Therefore, gas offers us greater immunity from the vicissitudes of geopolitics. The second compelling reason is commercial. Gas is cheaper than oil–a fact that may well get accentuated as new discoveries come into the market. The example of the US is worth noting. Five years ago, US gas was priced at around $5.50/mmbtu. Today, it is selling for less than $2.50/mmbtu. This is because of the four-fold increase in production from shale formations during this period. Shale gas is abundantly available?China, for instance, is estimated to have huge potential?and there is, therefore, every possibility that a comparable price revolution might occur elsewhere. In all events, India can look forward to sharply lower gas prices in the future.
Beyond supply security and commercial logic, there are two other reasons for encouraging gas. One, it can be used as a substitute for transportation fuel (via CNG) and as an alternative to LPG/kerosene for cooking and lighting (via piped natural gas). This would substantially reduce the subsidy burden. Second, it is a relatively clean fuel. CO2 emissions from a gas-based power plant are 50% that from a thermal plant.
For these reasons, I would recommend that the finance minister bring down the duty on imported gas/LNG from 5% to 0?the same level as crude oil and grant it ?declared goods? status (as has been granted for power and coal). The positive fallout will stimulate demand and incentivise investments in import facilities and pipelines?the sine qua non for accelerating usage. Gas is a low-hanging fruit without political colour. The FM should pluck it on March 16.
The author is chairman of the Shell Group in India. Views are personal
