Column: Fuelled by ignorance

Feb 17 2014, 00:13 IST
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SummaryThe AAP-led debate on gas pricing betrays a lack of understanding of the industry.

I have been prompted to write this article by the FIR filed by the Delhi chief minister against the minister of petroleum, chairman of Reliance Industries and a number of others. I am not concerned about the specifics of the charges. Some are sub-judice and others will no doubt be investigated by the relevant authorities. I am also not concerned about the ulterior drivers behind these charges. I have no political axe to grind, nor any commercial involvement with the hydrocarbons industry. I left Shell more than a year ago. What I am concerned about is the lack of understanding of the oil and gas industry shown by people in power in their public pronouncements. In and of itself, this would not be cause for worry, but given that these statements have received wide currency, I am concerned at the negative signals this sends to investors. I have 35 years of experience in the hydrocarbons industry, and draw on this experience to provide an objective answer to the four questions that have been raised. Hopefully, these answers will elevate the quality of debate.

One, is there economic logic for increasing the price of gas from $4.20 per million British thermal unit (mmBtu) to $8 per mmBtu on April 1? The answer is yes. Unlike oil, there is no world price for gas. Oil has a global reference marker (Brent crude, West Texas Intermediate) and so there is little debate about its market price. There is no such marker for gas. It is currently sold for approximately $4 per mmBtu in the US; $6-8 per mmBtu in Europe, and around $16 per mmBtu in the Asia-Pacific region. When asked to determine a gas price for India, the Rangarajan committee decided to base it on a formula approximating the weighted average price across these three regions. This average was around $8 per mmBtu. Rangarajan could, of course, have adopted a different methodology. The committee could have considered the price major customers of gas would have been prepared to pay. Thus, a power plant fuelled by naphtha or LPG would be willing to pay at least $16 per mmBtu (as some are doing currently), given that the cost of liquid fuels is currently in excess of $20 per mmBtu on an equivalent basis. A power plant run on coal, on the other hand, would not pay more than $5-6 per mmBtu (and probably

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