Come clean on gas pricing

Mar 05 2014, 05:13 IST
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SummaryIf the uncertainty over gas pricing in India continues, then paying penalties and exiting exploration would make better sense for the companies.

Why has getting the gas pricing right become so important?

The root of this issue has three elements:

India is energy-deficient. Though hydrocarbon derivatives are the most-used fuels in the country, its reserves are not extensive.

The magnitude of risk finance required, technical, skill and manpower constraints necessitate infusion of private capital in the exploration and extraction of hydrocarbons.

The country's terrain does not offer a value preposition for this investment to most of the private upstream energy companies. Even for Indian companies and nationalised oil companies, it makes better economic sense to explore, discover and produce hydrocarbons overseas and import these into India.

India has rightly decided that its sovereignty can be negatively impacted unless a certain proportion of its hydrocarbon-requirement is produced domestically. The energy security policy is, thus, one of the bedrocks of our national economic and security policy.

The second element has necessitated moving away from nationalised oil production to the New Exploration and Licensing Policy (NELP). NELP created a fiscal and contractual regime for private capital to operate in. This meant that the sovereign bound itself under contractual limitations in exercising its powers while guaranteeing certain freedoms—amongst which is the freedom to market and price hydrocarbons based on market prices—to the incoming risk-capital providers.

The third element raises the issue of return on risk-capital. The challenging Indian terrain requires risk-mitigation to make it competitive. Some of the mitigation measures considered include 100% FDI, tax benefits, cost recovery, free-market pricing of gas, etc.

Thus, anyone participating in this debate has to answer all the three elements cogently to make a convincing case.

Why not move away from hydrocarbons to alternative sources of energy?

Even with the best and latest technology, there is no feasible alternative for substantial replacement of hydrocarbons—at least for the next fifteen years or so. This is without considering the cost of substitutes which could be prohibitive in financial or environmental terms—viz. nuclear waste, etc.

Why not have only nationalised companies work in upstream?

India was doing this in 80s when it ran into the forex crises. Reserve Replenishment Ratio has to be much higher than what we were managing through intensive and expedited exploration. The country’s economic growth cannot be sustained without growth of energy consumption and therefore local production.

In the 80s and the early-90s, we never found any major oil or gas field in India after Mumbai High. This was despite billions of dollars being spent on exploration. Globally,

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