The policy drift on gas pricing must stop. The November 2014 norms provide a robust system of gas pricing which balances the interests of both the producers and consumers
The Narendra Modi Government is keen to promote the use of gas and support it by increasing domestic production. But it wants to keep the gas price low so that it is affordable to key sectors, such as fertilisers and power producers, and is in sync with the macro objectives of keeping subsidy payments and fiscal deficit under check. This overarching objective is glossed over when it comes to pricing, even as the Centre is obsessed with giving a higher price to exploration and production (E&P) companies. Under the November 2014 guidelines for pricing of domestic gas, it did make an attempt to strike a balance between the interests of producers and consumers. Since March 2016 however, it has drifted to a point whereby the very soul of the extant formula is being undermined by fixing a floor price. This should be avoided.
However, the two major domestic producers of gas, Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), who together account for about 90 per cent of the total production in the country, have raised a hue and cry over the recent reduction in price of the fuel from $2.39 per million British thermal units (mmBtu) during April 1- September 30 to $1.79 per mmBtu from October 1. The Ministry of Petroleum and Natural Gas (MOP&NG) has promised a change in the methodology of pricing and set up a committee to examine various options. The relook is unjustified. The pricing of a crucial input such as natural gas has to strike a judicious balance between the overarching need to encourage consumption of this environment-friendly fuel (in sync with the Government’s aim to increase its share in the energy mix from the current level of about six per cent to 15 per cent by 2030) on the one hand and give necessary incentive to companies, who undertake investment in exploration and production in order to reduce dependence on import (currently about 50 per cent), on the other.
In particular, the price has to be affordable for major consumers such as the fertiliser and power manufacturers, which together account for nearly three-fourths of the total gas consumption. A vast majority of the consumers of fertilisers being poor farmers, the Government controls their price at a low level, unrelated to the cost of production, and reimburses the difference between the two as subsidy to the manufacturers. In power, too, the situation is similar, especially when it comes to fixing tariff on supplies to farmers and households. In this backdrop, a higher gas price will lead to higher subsidy payments; hence it is not desirable.
Prior to November 1, 2014, domestic gas was priced under an Administered Pricing Mechanism (APM). There was a multitude of prices depending upon the source of supply, namely from fields given to the ONGC and OIL on a “nomination” basis; blocks given to private operators or their joint ventures (JVs) with Public Sector Undertakings (PSUs) like ONGC/OIL and those awarded under the NELP (New Exploration Licencing Policy). The price varied from about $2 per mmBtu for supplies from ONGC/OIL to a high of over $7 per mmBtu applicable on supplies from private operators/JVs.
The allocation was done by a Gas Linkage Committee (GLC) headed by Secretary, MOP&NG, which decided which sector/industry would get how much and even within each industry, which company would get how much and from which field. The guiding principle was to allocate most of the low-priced gas from ONGC/OIL to fertiliser and power manufacturers — in line with the priorities laid down by the Government based on the recommendations of committees from time to time.
This GLC also had the responsibility of allocating imported LNG (liquefied natural gas). LNG is imported mostly by PSUs such as Gas Authority of India Limited (GAIL) and so on, who are also responsible for its handling, re-gasification/processing and transportation to consumption points. The APM regime suffered from several flaws, the most striking being controls on every aspect in the supply chain, multiplicity of prices and exercise of discretion by bureaucrats. As for basic objectives, it was neither helping consumers nor producers.
Though a price of $2 per mmBtu on supplies from the ONGC/OIL was intended to help fertilisers and power producers, the requirement of these sectors being far more than what these PSUs could supply, the balance had to be met from LNG at a much higher price. This also led to an anomaly whereby some manufacturers would get away with a major share of their requirement (or even all it) from ONGC/OIL at a low price even as others had to contend with high-priced LNG. The Government then decided to introduce a uniform pricing structure and in November 2014, it fixed the price of almost all domestic gas (except for supplies from pre-NELP fields where the production-sharing contract with the operator did not provide for approval of price by the Government) based on a weighted average of gas prices at four international locations — Henry Hub (US), NBP (National Balancing Point) (UK), AGR (Alberta Gas Reference) (Canada) and Russian price for a full year, three months prior to the date from which the price takes effect.
This formula-based approach provided a “certain” and “stable” policy environment under which firms can take decisions based on their assessment of the expected movement in gas price at these trading hubs. It provides a level-playing field to all firms. It maintains a “neutral” stance between producers and consumers i.e. when, the price increases, the former gain whereas, under a decreasing price scenario, the latter benefit. As per the above guidelines, the price was $5.61 per mmBtu from November 1, 2014; $5.18 per mmBtu from April 1, 2015; $4.24 per mmBtu from October 1, 2015; $3.39 per mBtu from April 1, 2016. During these periods, the producers were happy. Thereafter, even as the price declined further (from October 1, 2016, it was $2.78 per mBtu and from April 1, 2017: $2.75 per mBtu) they started mounting pressure on the Government to ensure that it does not go below a certain threshold. The latter refused to bow down, rightly so. But yielding to pressure in other ways, in March 2016, under a special package for supplies from deep/ultra-deep, high-pressure/high-temperature fields, it allowed a “premium” price linked to the prices of alternate fuels, including fuel oil, naphtha and imported LNG. In July 2017, it allowed Market-Based Price (MBP) on supplies from fields given under the Open Acreage Licensing Policy (OALP). The MBP was also made applicable to unconventional fuels viz. shale gas, coal bed methane (CBM) from fields under NELP.
With these new introductions/packages, the Government has given a slipshod treatment to uniform pricing. With a multitude of prices back on the table, bureaucrats will rule the roost. They have the power to decide which pricing class a particular field has to be placed in or approve “how much of shale gas or CBM is coming from a field under NELP” as that quantity is eligible for higher price. Now producers want even the base price of domestic gas to be altered to protect them from the downslide. Reportedly, an option is to have a floor price to be determined on the basis of the Japan-Korea Marker (JKM), a benchmark index used to determine LNG tariff in North Asia with a discount. With JKM prices hovering over $5 per mmBtu, even with $1 mmBtu discount, the floor price will be close to $4 mmBtu.
It would appear that our policy-makers don’t care about protecting the interest of consumers. They assume that users will pay any price that suits the producers. Don’t they realise that increased payments by fertiliser and power manufacturers on account of higher gas price will have to be reimbursed as additional subsidy and lead to a higher fiscal deficit?
This policy drift must stop. The November 2014 norms provide a robust system of gas pricing which balances the interests of both the producers and consumers. It also adequately takes care of so-called difficult fields like KG-DWN-98/3 operated by Reliance Industries Limited, which entail higher investment when compared to shallow or on-shore fields. The former yield output, which is “many times more”, resulting in corresponding higher revenue generation even with the same (albeit uniform) price. At the committed production rate of 80 million standard cubic meter per day even at $4.2 per mBtu, RIL would have recovered its entire investment of $5.6 billion in KG-DWN-98/3 in 15 months.
There is not only a strong case for keeping the November 2014 guidelines intact but also rolling back subsequent pricing decisions. While the latter may not be possible, the least the Government can do is not tinker with the extant guidelines.
(The writer is a New Delhi-based policy analyst)
