Natural Gas Pricing: At the crossroads

Rangarajan?s suggestion of $8.2/mmBtu is most likely to be accepted, grudgingly by some and with alacrity by others

The Rangarajan committee?s recommendation that domestic natural gas be priced at $8.2 per mmBtu, based on a mix of international prices, has provoked strong and varied reactions across stakeholders. This is because it is almost double the current prices, which range from $4.2 to $5.7 per mmBtu. The petroleum ministry has suggested a slightly lower price than that recommended by the committee, and that it should be revised quarterly till 2017, after which the Kelkar committee recommendations, if acceptable, can be implemented. The finance ministry and the Planning Commission would like a higher price around $10 per mmBtu. The power sector does not want the price to go beyond $5 per mmBtu. This is presumably because gas plants will lose out on merit order dispatch and may not get their higher tariffs accepted by the regulator. Also, distribution companies may indulge in load shedding rather than pay for the extra cost. The fertiliser sector gets the full subsidy from the government and would be unaffected by the price hike, but makes the point that better value is derived by using gas for feedstock rather than fuel. The low cost domestic gas producers would be happy with the increase but would still want international prices for deep sea exploration where production costs are high and appetite for making investments at current prices is low. Meanwhile, the LNG suppliers are laughing all the way to the bank.

Currently, there is a shortfall between domestic production and demand, which will continue to widen (see chart). The recovery of production from Reliance?s KG basin will take 2-3 years and LNG imports, currently priced at around $12 per mmBtu, are making up for part of the shortfall.

Nonetheless, gas-based power plants of about 24,000 MW capacity are stranded for want of gas. One new LNG terminal at Kochi will be commissioned this year but two more terminals on the east and west coast are likely to come up only by 2017-18.

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Along with the price imbroglio, there is a proposal to change the gas utilisation (rationing would be a better word) policy where currently the fertiliser sector gets priority followed by LPG extraction, the power sector and the sundry rest. It is now proposed to give the fertiliser and power sector equal priority. But the point is that the size of the cake remains the same and some fertiliser plants will have to do with less or switch to naphtha. There is also the argument that unlike power, fertilisers can be imported.

There is also a talk of pooling imported and domestic gas prices with a flat price for all sectors. This is a retrograde step and brings back memories of the days when the Oil Coordination Committee (OCC) was in the ascendancy and there were innumerable pools for various costs in the oil industry. If gas prices are pooled, it would not be possible to establish market-driven arm?s length prices under NELP contracts and it will allow domestic producers to piggy back on high price imports.

At this point, it is instructive to compare pricing and reforms in the oil and gas industry. Natural gas belongs to the same family of hydrocarbons as crude oil, though the former consists of lighter molecules and is more environment friendly. Both are sourced by drilling underground and wells sometimes yield both oil and gas. Imports of both resources will be increasing in the future and will be paid for at international prices. Both resources cater to various sectors of the industry, though in varying degrees. The domestic producers are allowed to charge international prices for crude oil but the government companies have to part with a large share to the oil marketing companies as a contribution to subsidies. However, this may not be for too long. Prices of petrol, diesel, LPG and kerosene have been subsidised over the years, although the intention was to match them with international prices 10 years back. Various governments were, however, unable to do so. They were worried about the inflationary impact on diesel prices and the spectre of housewives brandishing their chapati rolling pins if LPG prices were increased. But the government in recent months has chosen to bite the bullet, allowed OMCs to increase prices of petrol and diesel to international levels, and provided targeted subsidies for LPG with plans for similar targeting for kerosene. This has taken place with just some initial protests from the users. Price increases of petrol and diesel are now routinely reported in the press, and banner headlines such as ?Government mulls price increase? have disappeared. The era of marketing both domestic crude and products at international prices has finally arrived.

So, why can?t domestic gas be priced at international rates and customers asked to pay for corresponding increase in power tariffs? The government can continue to give targeted subsidies for fertilisers, importing more fertilisers from abroad and establishing fertiliser plants in the Middle East. Or will the Rangarajan committee have the last word? The price recommended by the committee is a mix of various international prices, one of which is the Henry Hub price in the US, currently around $4 per mmBtu. The Henry Hub is a location in the state of Louisiana, which connects a network of nine interstate and four intrastate pipelines and generally sets the price for domestic gas in the US. The price is currently at a record low because of shale gas production, which has made the US self-sufficient. There is no logic in allowing the Henry Hub price to dictate our domestic prices any more than the price of vegetables in the Azadpur mandi in Delhi (the largest wholesale market in Asia) dictating the price of vegetables in the US.

But the recommended gas price of $8.2 per mmBtu coincidentally falls half way between domestic and international prices and is most likely to be accepted by the stakeholders, grudgingly by some and with alacrity by others. With the country now in the election mode, further reforms may not be possible. It will fall on the next government, in 2014, to take the reforms further and it will do well to consider speedily introducing international prices for domestic gas rather than waiting for 2017-18, primarily to boost domestic production and put natural gas at par with oil.

The author is distinguished fellow, The Energy and Resources Institute (TERI), New Delhi

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First published on: 26-06-2013 at 04:53 IST