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Thursday, 18 April 2013 00:00
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The alternative is a constrained supply situation

 

Finance minister P Chidambaram’s statement that the government is considering freeing up energy prices is certain to stir up a hornet’s nest given what it will mean in terms of increasing costs in end-user industries such as fertilisers and electricity. Indeed, even Prime Minister’s Economic Advisory Council chairman C Rangarajan’s proposal to roughly double prices of natural gas, such as that paid to Reliance Industries for its KG Basin output, faced opposition since it would mean electricity tariffs would have to be raised by another R1.6 per unit and fertiliser costs would have got raised by another R30,000-40,000 crore per annum. At a time when the government is, in any case, raising diesel prices by 45 paise per litre per month—between April 16, 2012, and April 16, 2013, while global crude prices fell 15% and the rupee depreciation neutralised this by 6%, daily petroleum under-recoveries fell 38%—freeing up of other fuel prices is probably the last thing it needs. Prices of Indian coal are, for instance, 30-50% lower than global coal; natural gas prices are around $4.2/5.7 per mmBtu versus around $13-14 for imported LNG.

While doing nothing may be a politically expedient strategy, the alternative is a sharp fall in domestic availability of fuels. India’s import dependence of oil is projected to rise from 76% in FY11 to 81% in FY17 according to the 12th Plan document, from 19% to 28% for natural gas and from 20% to 22% for coal—all told, overall import dependence is projected to rise from 37% in FY11 to 38% in FY17. No matter what Indian policymakers may choose to do for domestic suppliers, it’s clear 38-40% of India’s energy supplies will have to be purchased at global prices. The debate then shifts to whether India should, to compensate, keep prices low for the balance 60-62% of its energy needs. If keeping prices low doesn’t constrain local supplies, that’s a great strategy since it keeps fertiliser and electricity prices low. The problem, however, is that domestic supplies also fall when output prices are low. According to global consulting firm IHS, more than 80% of India’s current discovered gas reserves are viable only at a price of over $10 per mmBtu—that’s around two-and-a-half times what RIL gets for its KG Basin gas at the moment. Since many believe such pricing demands are nothing but gouging by private sector players, it would be a good idea to see if state-owned ONGC would be prepared to develop its deep and ultra-deepwater fields in the KG Basin at the current $4.2 price. It’s interesting to keep in mind that, due to price controls, the number of oil/gas exploration blocks awarded by India is down from around 50 in NELP 6 to roughly a fifth in NELP 9—and within this, the share of the private sector is down dramatically, to just 45% in NELP 9. A government going into an election may not want to take a price-increase decision in a hurry—indeed, the Rangarajan recommendations are a half-way measure to fully-free prices—but there is no getting away from this if India’s energy supplies are to be even partially secured in even the short term.

 
 

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