Economic Highlights
New
Delhi, 7 March 2014
Mounting Gas
Price
GOVT LOSS, COMPANIES
GAIN
By
Shivaji Sarkar
The gas price issue is taking an interesting turn. The
Government refuses to cancel the contract with Reliance pending arbitration.
Minister for Petroleum Veerappa Moily remains firm on increasing the price to
$8.4 per million BTU (MBTU). There are provisions for further price increase to
$13.8 per MBTU. It is almost a continuous process of mounting losses on the
nation. Reliance itself in the court has said that its production cost was
$1.43 per MBTU.
Meanwhile, according to reports, Reliance has started
drilling wells in D6 though so far it has yet to get environmental clearance.
Apparently after years of dilly-dallying, the company has started its work
despite issues remaining in arbitration. This has also drawn flak from the
public sector ONGC. It has complained that Reliance has dug a well just 200
metres from its operational well in the Krishna-Godavari (KG) basin. In effect,
the ONGC has virtually said that its gas would be robbed.
However, interestingly enough, ONGC has not said a
word on the gas price hike. It wants to sail on about Rs 16,000 crore
additional profits due to the increase. According to ONGC, its production cost
is around $ 3.6 per MBTU.
The price hike is ominous because it would increase
subsequently transportation, fertilizer production and many other costs. The
impact would be an overall inflation and unnecessary heating up of the economy
particularly at a time when the industry is grappling with the high costs and
fall in demand in the market. It would not be easy for the new government
either to roll the prices back or contain inflation.
The Power and Fertilizer Ministries have already
expressed concern over the hike in gas prices and their adverse impact on power
tariffs and fertilizer costs. This would increase outflow of in terms of
subsidies for the power and fertilizer by Rs 400,000 crore. It would
immediately double LPG cost of cylinders and increase the risk to 28,000 mw of
installed capacity of gas-based plants. The Reliance profits simultaneously
increase by Rs 75,000 to Rs 100,000 crore.
Questions have been raised as to why the price of
petroleum products produced in the country and used for domestic purposes is
being pegged at international level, for it having a severe impact on the
economy. Regrettably, it appears that the policy orientation is not pegged towards
benefitting the nation but is limited to the profits of some companies. This
needs to change so that the entire economy could benefit from domestic
production and help costs and subsequent market prices remain at a low level.
Former Principal Adviser (Power & Energy) Surya
Sethi has pointed out in his article in The
Hindu that nowhere in the world is the price of well-head gas linked to the
price of liquefied natural gas. He has also highlighted that the spot price in
the Henry Hub Terminal today is $3.77 per MBTU which is also higher than the
well-head price of gas in the US.
In Gulf countries, the price of gas is only $1 per MBTU, in Egypt $2.57, in Nigeria
$0.11, in Australia $5 and
in Indonesia
around $1.
Recall that in July 2013, the gas price hike was
protested by BJP leader Yashwant Sinha. As chairman of the Standing Committee
on Finance, Sinha had suggested a rethink on Prime Minister’s advisor C
Rangarajan committee formula that had advocated the hike. Sinha did not find
any substance in the Rangarajan recommendation for fixing domestically-produced natural gas price at
an average of international hub prices and cost of imported LNG instead of the
present mechanism of market discovery. The committee considered it a default
and not a failure. And according to Moily, there is no punishment for default
except cancellation of the contract.
CPI MP Gurudas Dasgupta has stated that the Moily
formula was for continuous rise and the price of $8.4 is not the final price as
RIL had demanded a price of $13.8 MBTU in due course. He too says it is solely to
benefit the private company and increase Government’s subsidy burden by Rs
76,000 crore for importing it.
In fact, the story of the high price of Reliance
gas -- $4.2 per MBTU – had begun way back in 2007, when it was sent by the
Empowered Group of Ministers (EGOM) headed by Pranab Mukherjee.
Reliance itself admitted in the court case
between it and NTPC/Anil Ambani Group that its production cost was $1.43 per
MBTU. Reliance Industries Ltd. (RIL) had initially agreed to supply gas at
$2.34 to both NTPC and the Anil Ambani Group, which it subsequently reneged
once the EGOM set the price at $4.2. It might be noted that by its own
calculations, RIL would have made profits of 50 per cent if it had supplied gas
at $2.34.
The Oil Ministry and RIL have locked horns over the
reasons for a sharp decline in gas output from KG-D6 block for last three years,
virtually since 2009. Output from D1 and D3 gas fields in the block fell
sharply after achieving about 62 million metric standard cubic meters per day
about three years ago. The fields are currently producing less than 10 mmscmd
gas, which is far below the peak output of 80 mmscmd.
Moily’s predecessor S Jaipal Reddy had in May 2012
slapped a penalty of $1.005 billion on RIL for lagging behind in gas productions.
He had commented that the company by not producing the gas was virtually
hoarding it. The RIL disputed the penalty and arbitration was initiated. However,
no similar notice seeking fines has been issued for 2012-2013 — even though
Reliance has admitted that its gas production will reach only 1.847 trillion
cubic feet, against a target of 2.957 trillion cubic feet.
The Comptroller and Auditor General in its report has
said that RIL had breached some terms of production sharing (PSC) contract with
the Government for more lucrative blocks and blamed the Petroleum Ministry for
its failure. The CAG also stated that the current PSC encouraged companies to
reduce the share of Government in the profits by skewing expenditure bill.
The entire process calls for vetting of executive
proposals before a decision is taken. The loss to the nation is not limited to
this case. There are many others, almost in all departments that have turned
into scams because of bureaucratic adamancy and the lack of a final vetting
process. The country hopes the new government would put this in place. ---INFA
(Copyright,
India News and Feature Alliance)
|