Government policy may hurt growth
By Anjan Roy
It’s an Einsteinian problem in relativity. The policymakers in India’s hydrocarbons sector are facing a problem of equating 17 US dollars to an average of 4.2. Let us elaborate. Petronet LNG, co-promoted by the Public sector Gas Authority of India Limited (GAIL) and principal marketer of the Australian LNG, recently contracted Liquefied Natural Gas from Australia at a price 4 times at which most of natural gas produced within the country is sold. Petronet contracted a price which would work out to 17 US dollar per million British thermal unit at 100 dollars a barrel oil price. The authorities have now struck on an idea of bringing about a uniformity of prices for supply of natural gas to customers in different sectors by pooling gas produced from India’s traditional gas and oil fields, new exploration blocks, still newer private sector companies engaged in gas extraction as well as imported gas from overseas.
The government has gone ahead and now created a high level gas pooling committee headed by Mr. Soumitra Choudhury, member, Planning Commission. The plan panel presumably will examine aspects of a pooling arrangement, advisability of pooling and, if accepted, how it can be implemented. A private sector consultancy organisation has already submitted a report on gas pooling which was appointed by GAIL. It is, of course, incidental that GAIL and Petronet are naturally inclined towards an idea of gas price pooling. Basically gas price pooling is not very different from any administrative pricing mechanism. We had earlier a regime for administratively controlled pricing for oil which we are struggling to come out from. The idea of price control and uniformity in pricing is as old as independent India. To promote industrialisation all over the country, the government of India had introduced a scheme of freight price equalisation scheme for steel, coal, cement as in the 1950’s. The burden of freight price equalisation scheme for steel and coal could be thrown off only after reforms were introduced in early nineties.
Any effort at price control is a move away from the market system and it invariably introduces distortions and additional costs. It also militates against optimum distribution of resources through under-pricing. For example, not allowing domestic retail price of oil and other petroleum products to reflect the imported costs has resulted in widespread misuse and waste of a scarce resource and more so, when 80% of oil consumption within the country is imported. Now we are trying to introduce a similar wasteful mechanism for gas pricing in the name of developing a gas market in India and uniform prices. The entire effort is only a façade for providing artificially low prices for gas as feed stock for power and fertilizer sectors, which are already getting the bulk of the gas produced at the lower rates.
Bringing about uniformity of gas prices for different sectors is an even more complex exercise than administrative pricing for oil or freight price equalisation scheme for steel and coal. Gas is produced by different producers on the basis of their costs of production: Gas produced from different wells have different costs of production and different prices. Thus you have wells started before the new exploration and licensing policy (NELP) were introduced, then you have gas produced by wells after introduction of new exploration and licensing policy and lastly imported LNG. The prices range from 4 dollars per mmbtu to 17 dollars per mmbtu. The prices change frequently. Bring some kind of uniformity is intellectually stimulating no doubt, but a scheme for bringing about uniformity of all these prices would be a Herculean task.
A report by Mercados Energy Markets Private Limited, a Spanish consultant, has suggested various models for pooling namely, cost based general pools, cost based sectoral and bid based pools. These include comprehensive cost based pools of all gas producers and traders including APM Gas, gas from NELP blocks, long term LNG and spot LNG. Like the variety of gas sources, the Mercados report also has a variety of combination for operating pooling. From compulsory participation to voluntary participation, including public sector companies or excluding them, including the private sector or excluding them and many other permutations and combinations. On the basis of sectoral pools, the report gives option for a single pool priority sector, priority sectors of power and fertilizers or two separate pools for the two sectors.
Obviously, the administrative mechanism for such a system will have to be worked out and the detailed rules will have to be formulated. Existing production sharing contracts will have to be re-worked which inevitably result in litigations. For the new system to function, it will have to have institutional structures and governance arrangements. Mercados favours that GAIL should operate the pool.
It is difficult to comprehend why is the government thinking of bringing into place a complex, cumbersome mechanism for the emerging gas sector when experience with controlled pricing for oil has resulted in rigidities which has plagued the oil sector for long. Pricing is basically a commercial decision. However, controls have turned it into a political issue. Oil pricing should be a commercial decision of oil producers. If some weaker sections have to be subsidized, they can be given such state help directly. We are, as a matter of policy, moving in this direction in many other fields by providing direct Cash transfers to the weaker sections. If power and fertilizer sectors are to be given gas at lower prices, these companies can be given gas for the lower cost production fields. The overall costs to the economy will thus be much less than introducing a horrendously complicated mechanism for equating a product priced at 17$ per unit to a product priced at 4.2$ per unit. If done so, someone has to subsidise in between, however much the subsidy is sought to be camouflaged. As some of the sources have pointed out, pooling could mean “subsidising international gas and LNG producers and help them increase their market share at the cost of Indian companies. The end result will be the complete emasculation of the growth triggers of an emerging indigenous industry and the potentials it can achieve. Gas pricing at least be market driven allowing for natural growth of an industry. (IPA Service)