Editorial: Realism on gas prices?

By: | Published: February 26, 2015 12:35 AM

Oil ministry releases Kelkar report on gas prices.

Given the government’s reluctance to implement the Rangarajan committee’s recommendation of doubling the gas prices to $8.4 per mmBtu, the petroleum ministry making the September 2014 Kelkar panel’s report on the oil sector reform public just ahead of the Budget session of Parliament is interesting since one of the key Kelkar recommendations is that gas prices be completely freed up by 2017. In which case, the most likely interpretation is that, with the Delhi assembly elections out of the way, the government realises it is now time to get down to business. As Kelkar has pointed out, if investors are to come up with long-term investment plans, they need to know what prices are—the kind of uncertainty seen over the last couple of years has more or less resulted in gas exploration coming to a halt. Indeed, since crude oil is internationally priced anyway, it was never clear why gas prices were curbed. The recommendations have other implications as well since you cannot have free-market pricing if markets are constrained—hence a key Kelkar panel suggestion is that the current gas allocation policy be scrapped. Were that to be done, for instance, prices of city gas would also go up. At some point, the same logic of market pricing, and the damage not following this will cause, will have to be extended to other fuels like coal as well—it is difficult to envisage vibrant commercial mining of coal if prices are not freed up.

Apart from leaving natural gas pricing to markets, the panel has made other important suggestions to fix the sector. For one, to improve India’s attractiveness, it recommends enough funds be provided to get independent studies done to map India’s hydrocarbon reserves—this will be helpful for firms deciding whether or not to bid. On-tap licensing instead of the once-a-year bid rounds is another sound suggestion, along with allowing contracts to be extended till the end of their natural life, as is the global practice – many large producers like Cairn are suffering on this account. And, finally, the government simply has to start trusting firms on their costing instead of fighting as it is right now—while Kelkar is opposed to revenue-sharing in place of current profit-sharing model, FE has long argued India is unlikely to accept company costs as long as there is a CAG process, and so revenue sharing is a good way out. The panel estimates that if its recommendations are implemented, annual savings of $70-80 billion can be made, with the import dependence on oil and gas going down from 62% in 2012 to 39% by 2030—in a business-as-usual scenario, it will rise to 77%. The choice seems an obvious one.

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