Sunday, April 7, 2013


Innovative Exercise to Benefit Contractors

THE pricing of natural gas has become an issue of public debate after the exposure of the government’s desperate bias for the private players in the field. In fact the pricing exercise for domestically produced natural gas — the changeover from the administrative price mechanism to the so called “market price discovery regime” in phases --- has been a hectic exercise meant solely to benefit the contractors handling this crucial natural resource --- a veritable national asset --- at the cost of agriculture, power sector and common consumers. 


As we know, the production and marketing of gas in the Krishna Godavari basin (KG Basin) started in 2009. Prior to this, natural gas was priced through the administrative price mechanism (APM), at the rate of 1.83 US dollars per mmbtu (million metric British thermal units), and the public sector Oil and Natural Gas Commission (ONGC) sold gas at this very price. But the entry of private sector into the field of natural gas production and distribution resulted in dual pricing of gas --- (1) administered and (2) market linked. The administered price was determined through the APM; it essentially was the cost of production plus a reasonable profit.

However, for obvious reasons the bench mark of reasonable profit cannot be acceptable to private players like the Reliance Industries Limited (RIL). The RIL then successfully compelled the government to constitute an empowered group of ministers (EGOM) in 2007 to suggest a much higher rate of natural gas. In its turn, on September 12, 2007, this EGOM approved a rate of 4.2 USD per mmbtu, which was to be effective from April 1, 2009, as against the ONGC rate of only 1.83 USD. Astonishingly, in June 2004, the RIL itself had offered a price of 2.34 USD per mmbtu to the National Thermal Power Corporation (NTPC), a maharatna PSU, against international competitive bidding and the offer was for 17 years.

In retrospect, this EGOM moved with undue haste to fix the price of natural gas at a level 79 per cent above what the RIL itself offered to NTPC in 2004 (USD 2.34), only to match the RIL’s subsequent demand. This rate was only symbolically lower than that of 4.33 USD per mmbtu asked for by the RIL.

Further, as per the approval given by the EGOM, this rate was to be valid for five years and it might be extended after five years. Thus, any revision of rate is not due before April 2014. Despite this validity date till April 2014, however, Reliance in early 2012 demanded an immediate premature increase in the KG gas price in view of an increase in gas price in the international market, demanding that the KG gas be hiked to USD 14.2 per mmbtu. What happened after that is an open secret --- the then union petroleum minister, S Jaipal Reddy, stoutly resisted the demand and paid the price for opposing the Reliance.

Then, with effect from June 1, 2010, the government revised the APM gas price in the country to 4.2 USD per mmbtu (inclusive of royalty), excepting in the North East, where the APM price is 2.52 USD per mmbtu. The latter price is 60 per cent of the APM price elsewhere, and the balance 40 per cent is being paid to nationalised oil companies as subsidy from the government budget.

Thereafter a committee was set up under the chairmanship of Dr C Rangarajan, chairman of the Economic Advisory Council to the prime minister, to look into the production sharing contract mechanism in petroleum industry, including a formula for pricing of domestic gas. The committee was asked to submit its report by August 31, 2012. Among other things, the terms of reference of the committee included “structure and elements of the guidelines for determining the basis or formula for the price of domestically produced gas, and for monitoring actual price fixation.”

The report of the committee was submitted to the government in December 2012 and was made available in the public domain on the website of the Economic Advisory Council in January this year. In addition to making a recommendation in favour of the production sharing contract mechanism, the committee also recommended a formula for the pricing of domestic gas.


The crucial thing to bear in mind here is that natural gas has the status of a strategic raw material and energy source, and therefore our approach to its pricing must be determined by an understanding of how this strategic raw material can help the nation meet its principal challenges in the years to come. As per the population forecasts from the United Nations, India will become the world’s most populous nation in another two decades. At present the per capita consumption of energy and fertiliser in our country continues to remain at a pitiably low level. The deficit in availability is huge --- both in fertilisers and power. All policy formulations and strategic decisions of the government must therefore be aimed at ensuring the availability of natural gas at an affordable price to the fertiliser sector as well as power sector in order to improve the quality of life of our people in the years to come.

This is important. The availability of food across the nation is not satisfactory. More than 79 per cent of the population do not have the ability to spend even Rs 20 a day. India ranks 67th out of 81 nations as per the International Food Policy Research Institute’s 2011 report on Global Hunger Index. There was a nationwide two day strike by all the central trade unions and federations during February this year and one of the major demands was about curb on price rise and universalisation of the public distribution system. Demand for enactment of a food security bill to ensure the supply of 35 kilograms of grains to each and every family at a price of Rs 2 per kg has also gained momentum. It is essential therefore that food production must increase by leaps and bounds. But this also means that fertiliser production must go up and made ever more competitive domestically. The current gap between the consumption of fertiliser nutrients is about six to seven million tonnes. At least six to eight new projects, with 1.2 million tonnes capacity each, are needed so as to fill up the present gap in consumption and production gap and to meet the further increase in urea demand in the next five years. India is already the world’s largest importer of urea --- at about seven million tonnes per year. The import bill has reached an all-time high and the subsidy on imported fertilisers has already surpassed the subsidy on indigenous production. If the necessity of setting up additional capacities is not realised, the nation will lose the battle for providing food security to all. Strategically, this would certainly not be desirable for the going-to-be-most-populous nation in the world, which also aspires to become an economic superpower.

As regards energy, around 40 per cent of the population is yet to gain access to electricity. The per capita consumption of power --- at around 750 units per annum --- is less than one third of China. Economic growth is unable to reach its full potential due to the continued and exacerbating shortage of power. In addition, the financial situation of the state electricity boards and distribution companies is weak, placing severe constraints on their ability to buy power. It is important, then, to keep the prices of fuel, be it coal or natural gas, at affordable levels.

The total installed capacity for power generation in the country is 2,11,766.22 megawatt (MW). Out of this, the generation through gas is 18,903.05 MW, which is only 8.92 per cent of the total generation. On the other hand, in view of environmental hazards of other modes of thermal generation like through coal etc, and also in view of limited reserves of coal, natural gas is becoming a preferred fuel for power generation and its demand is increasing fast.

Also, besides the demand for natural gas in the fertiliser and  power sectors, its demands is also increasing in the transport sector (as it is a non-pollutant fuel) and also for city gas distribution projects.


On the contrary, the indigenous availability of natural gas is quite inadequate. There are only a few producers of gas whereas the number of consumers is increasing day by day. There thus exists a huge demand-supply gap even in the present scenario. The 12th Five Year Plan’s estimate has suggested that a major proportion of growth in demand is likely to come from the power and fertiliser sectors. Its consumption in power sector, which is currently at 61 mmscmd (million metric standard cubic metres per day) is projected to increase to 207 mmscmd by 2016-17, while the current consumption of 37 mmscmd by the fertiliser sector is projected to translate into a demand of 106 mmscmd by 2014-15 and stay at that level for some time thereafter. The demand position for other sectors, where the current level of consumption is around 68 mmscmd, is likely to increase to 153 mmscmd by 2016-17. Collectively, thus, the total demand is likely to grow from 166 mmscmd at present to 466 mmscmd by 2016-17, with a compound annual growth rate of 18.75 per cent.

Table I alongside presents the current demand scenario in various sectors of the economy.


This Table I must be viewed in conjunction with Table II given alongside, in order to have an idea of the significant demand-supply gap on the basis of the gas availability projections for the same period.


Total Projected Gas Availability during the 12th Five-Year Plan Period (Figures in mmscmd)



Hopefully, nobody would doubt that these aspects should have been duly taken into consideration before recommending any formula for the pricing of domestic gas. However, what is in store for all of us in reality is beyond imagination. Having dealt with the issue, the Rangarajan committee report has recommended that the price of domestically produced natural gas must be determined as an average of the international hub prices and the cost of imported liquified natural gas (LNG), but this would certainly have an even more atrocious impact on the gas price than the latest mechanism of the so called “market discovery,” adopted by the EGOM in 2007, can have. The panel has, in its report that was made public early this year, suggested that we must first collected the market prices in the US, European and Japanese hubs and then take an average after including in it the netback price of imported LNG, in order to get the sale price of domestically produced gas. Also, for supply under the gas utilisation policy, the price thus determined must apply equally to all sectors regardless of their priority.

The possible consequences of implementation of the formula, thus recommended, for the fertiliser sector are as below:

1) It shall cause an increase in price of domestic gas by at least 4 to 4.5 USD per mmbtu of gas or more.
2) An increase of one USD per mmbtu will increase the total cost of production of urea, at present about 18 million tonnes, by more than Rs 2300 crore. An increase of 4.25 USD per mmbtu translates into an enhanced cost of production of about Rs 5,500 per tonne of urea or almost Rs 10,000 crore for 18 million tonnes of urea per annum.
3) The government of India is subsidising the domestic production of urea to the extent of 60 per cent of the cost and subsidising the import of urea to the extent of 75 per cent of the cost. The subsidy on domestic urea alone is around Rs 25,000 crore. On implementation of the recommended formula, the burden will increase by no less than 40 per cent.
4) Urea is at present being sold to farmers at an MRP of Rs 5,310 per tonne. In case the entire burden is passed on to farmers, the MRP would get doubled. Will the farmers, facing several other problems already, be able to bear an increase of more than 100 per cent in retail price?
5) The enhanced retail price shall dislocate the entire fertiliser market. This would have a very adverse impact on fertiliser consumption which will result in reduced production of foodgrains and other agricultural crops.
6) The implementation of the recommended formula will have a disastrous effect on the energy sector also, causing a very steep rise in the unit cost of power generation.
The possible consequences of implementation of the recommended formula on the power sector are as below:
1) An increase of one USD per mmbtu will increase the total cost of production by Rs 4,350 per MW per annum. That is, for the present level of generation of 18,903.05 MW through natural gas, the cost will rise by Rs 8.22 crore.
2) An increase of 4.25 USD per mmbtu translates to enhanced cost of production by Rs 18,487.5 per MW. For the entire generation through gas as on date, the cost will be enhanced by about Rs 35 crore.

All this will cause a quantum jump in the power tariff to be borne by general consumers.

We are aware of the specific caution given by the committee of secretaries, headed by the cabinet secretary, in July 2007 that a delivery price beyond 5 USD per million unit will be prohibitive for fertiliser sector and that beyond 2.34 USD, for power sector. But it appears that the caution has completely been ignored. It has come out in press that the petroleum ministry has already given its approval to the Rangarajan committee’s recommendations. After the petroleum ministry, the finance ministry too, in its union budget 2013-14, has punched its stamp of approval on the recommendation for review of the existing gas prices. The RIL and other private players have already started celebrating the event, even though the proposal is first to go to the EGOM before it is approved by the union cabinet. CITU general secretary Tapan Sen has already written a strong letter to the prime minister opposing the disastrous move of the government that has got to be stalled. Public opinion against the government’s move is required to be generated in order to ensure food security, fertiliser security and energy security in the country.

Nishith Chowdhury People's Democracy 07 April 2013

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