Column : Can’t do gas pricing in a vacuum

Jan 21 2013, 01:08 IST
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SummaryAvoid implementing Rangarajan’s prescription till fertiliser and power are freed up.

Barely a few months after the news of allowing RIL to increase the price by 3.5 times the current level on the supplies from its KG fields, the spectre of a steep hike has come to haunt users again.

A committee under C Rangarajan, mandated to suggest the design of future contracts for exploration and production of oil and gas, has also recommended a basis/formula to price domestically produced gas. It has suggested price to be benchmarked to four series of international prices, viz Henry Hub (HH) in the US, National Balancing Point (NBC) in the UK, netback prices of sources of LNG supply for Japan, and netback price of Indian imports of LNG at well head of exporting countries.

The weighted average of two sets of prices—HH in the US & NBC in the UK and netback from LNG exports to Japan and India—would be the price of domestically produced gas. It will be a daunting task, if not impossible, to determine the netback from LNG exports to Japan and India. It is also doubtful whether international prices in the US and the UK would be relevant to Indian situation.

Even so, imported gas being only 20% of total gas supply in India, how can international price serve as a credible reference point? Nonetheless, the committee has given some basis as against none at present. (Under PSC, operators are expected to discover prices by inviting competitive bids from potential customers. However, this was ignored when the EGoM fixed the price in 2007.)

The basis will be reviewed after five years, by which time the committee expects the market for gas in India will be sufficiently developed and the infrastructure for supply, transportation and distribution will be in place.

The formula yields a price of $8 per million British thermal unit (mmBtu) versus the current rate of $4.2 per mmBtu for most of gas produced in country. On a landed cost basis, the increase works out to $4 per mmBtu.

This will increase the cost of producing urea by about $100 per tonne (25 mmBtu for a tonne) or R5,500. On production of 17.6 million tonnes from gas-based plants, industry will incur an extra cost of R10,000 crore.

In the view of control on MRP at a low level and unwillingness of the government to increase price even ‘marginally’, it will have to give that much additional subsidy to manufacturers. But, where is the money?

The budget allocation of R50,000 crore (2012-13) was exhausted by July 2012. Industry has not received payments for the last five months. Additional demand for R10,000 crore will compound their miseries.

The price hike will also increase the cost of power generation. For the majority of power producers, this is a pass-through under PPA with state electricity boards (SEBs)/power distribution companies (PDS). However, the latter won’t find it easy to increase tariff.

States that heavily subsidise or supply power free of charge to farmers and poor households may not increase tariff at all. This, together with T&D losses, puts SEBs/PDS under serious stress.

Unlike fertilisers, here the government may be under no obligation to pay subsidy to SEBs. However, it comes up with re-structuring support to salvage them, viz recent approval of close to R2,00,000 crore package. That dents the exchequer.

Power companies who have set up plants under the competitive bidding route are the worst affected. Without the facility of a ‘pass-through’, they have to absorb entire increase in price. Their plight is like ‘babies born sick’.

Considering the criticality of fertiliser and power to the economy, the government assigns them top priority in allocation of gas. It even controls prices of their end-products and heavily subsidises their sales using the taxpayer money.

Why should then a formula be adopted that results in ‘doubling’ of gas price playing havoc with these sectors? Yet, if it cannot be avoided, then the government needs to re-work its ideas regarding control and subsidy on fertiliser/power.

Having a market-based mechanism for the pricing of gas—that would result in ever-escalating cost to fertilisers and power on one hand and controlling prices/tariff of latter at low level on the other—is inherently unsustainable.

The issue is relevant to pricing of all sources of energy, not just gas. Prime Minister Manmohan Singh states that “for development to be sustainable and inclusive, domestic prices should be aligned to international cost”.

Based on the recommendations of Dr Kelkar, the government is reportedly working on removing subsidy on diesel by next year; on LPG 25% in current year and 75% in the next two years and by one-third on kerosene in 2014-15.

Whether or not the Kelkar roadmap will be implemented, especially considering that this coincides with impending elections—states in 2013 and general elections in 2014—remains to be seen. What is on the anvil for power and fertilisers?

For fertilisers, in 2000, the Expenditure Reforms Commission (ERC) had come up with a roadmap for phased de-control and subsidy removal. This was to be achieved by 2005-06. ERC report was consigned to memory lane. This should be resurrected.

In power, the ministry of power has made the availment of restructuring package contingent on states ensuring that SEBs raise tariffs to remove the gap between revenue and cost. However, a majority of them are reluctant to commit and therefore have not come forward.

The practice of allowing revenue to remain below cost must be shunned irrespective of whether there is a package or not. In fact, handing out a package (a similar package was given in 2002) makes states complacent, necessitating these to be given in perpetuity.

The government should quickly get into action mode in both these critical areas. Mechanisms need to be put in place to ensure that prices/tariff reflect cost of inputs including gas. That will help in reining in subsidy and potential backlash on the viability of fertiliser industry and SEBs—courtesy fiscal constraints. Until we see demonstrable action in both these critical areas, the government should refrain from acting on the recommendations of the Rangarajan panel.

The author is executive director, CropLife India, New Delhi. Views are personal

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