Govt no to market-pricing for gas despite contract
Though the nature of reforms differ from one sector to another, at their core is the acceptance of market pricing and enforcement of contract. Which is why it is odd, as FE reported on Friday, that the finance ministry has, for the second time in less than six months, turned down the oil ministry’s request to allow a greater element of market-pricing for natural gas. While doing so, the finance ministry has cited old chestnuts that include, for instance, this resulting in raising fertiliser and power subsidies—yet, even while there are subsidies on various petroleum products, the finance ministry has no problem in allowing producers to be paid market prices for the crude oil they pump out; in any case, higher gas prices mean higher royalties for the government and, hence, more funds to hike subsidies in areas like fertilisers.
Certainly, there is no case for paying prices in the $10 per mmBtu range that several producers were talking of a few years ago, given how spot prices of both crude and natural gas have fallen, but there is no doubt that at the current prices fixed by the government, even the public sector GSPC and ONGC don’t find it viable to pump the gas they have discovered in their deep-water basin in the Krishna-Godavari area—more than three-fourths of India’s natural gas is to be found in these tougher deep-water areas. What price should be allowed is difficult to say since there is no one Brent- or WTI-type of gas price, but it is worth keeping in mind that India is importing even spot gas at $7-8 per mmBtu today—the gas being bought from Qatar by the government-owned GAIL under long-term contracts is an even higher $12-13 since it is based on a formula linked to an average crude oil price over the past five years. If gas prices are fixed too low to incentivise local production, India will have to import at higher prices—about 40% of India’s gas needs are met through imports even today. The alternative, as has been done in the case of gas-based power plants, is to simply not utilise facilities—right now, lack of gas has meant that India’s 22,000MW of gas-based power operates at around 22-23% levels. In any case, since the government is not committing to buy the gas, if the RIL/ONGC/GSPC price is too high for local buyers, let them export it.
More important, the government has signed contracts that allow for free-market pricing—indeed, the very basis of the government attracting firms to explore for oil/gas in India is complete marketing freedom. Article 21.3 of the Production Sharing Contract that the government signs with any producer is categorical that companies will have the right to market the gas they produce. Article 21.6 says the gas is to be sold at arms-length prices and 21.7 talks of looking at domestic and international prices if, for some reason, such arms-length pricing is not possible. If the government is going to blatantly disregard contracts it has itself signed—and implemented in the case of crude oil—it is difficult to see how investors are going to be convinced India is a good place to do business in.