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Monday, 06 May 2013 00:00
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Govt losing time on gas or even coal-price pooling

 

Any discussion on whether or not the government should accept the Rangarajan committee’s recommendations on raising gas prices—to be discussed by an Empowered Group of Ministers (EGoM) later this week—must keep in mind the fact that, in a business as usual (BAU) scenario, India’s energy needs are likely to increase around four times in the next two decades and at least three times in an extreme energy efficiency scenario. Within this, coal needs are projected to rise around 4.5-5 times in a BAU scenario, oil around 3.5 times and natural gas more than 2.5 times. So whatever price of gas the EGoM arrives at, it needs to arrive at quickly. Similarly, the Cabinet needs to come to a quick decision on not just price pooling for coal, it needs to quickly come out with solutions to augment local coal supplies by, in all likelihood, bringing in top class global coal miners.

Almost all firms in the gas exploration business have indicated the current $4.2 per mmBtu is not enough for them to engage in more exploration—the IHS study commissioned by RIL’s partner BP has estimated that more than 80% of India’s current discovered gas reserves are viable only at prices of over $10 per mmBtu. While the state-owned ONGC has not endorsed the IHS numbers, it has said the current prices are unviable. Whether the EGoM agrees to $6 or $8 is up to it, but it’s important to keep in mind the decision can’t be postponed for too long since companies need to firm up their business plans and will take some years after that for the gas, if any, to be produced. Rangarajan’s report was made available six months ago and there still hasn’t been any conclusion. The objections of the power and fertiliser ministries are well known, but it is also important to keep in mind that around 9% of India’s power capacity is based on natural gas and the lack of gas has resulted in this functioning at just around half its capacity—there is a cost of this that also needs to be factored in.

In the case of coal price-pooling, similarly, those opposed to it don’t take into account that the lack of coal supplies mean that around 30,000 MW of thermal capacity has been put out of action due to this. On the face of things, this capacity can be operated using imported coal, but the costs are so high, it makes the operations unviable. This decision has also been hanging fire for many months now. Apart from the economic costs of keeping expensive capacity idle, it’s worth keeping in mind that the government also gets increased revenues from higher gas prices—in the form of taxes and cesses and profit-gas shares. Also, since the major players are also PSUs—ONGC, OIL and GAIL—the government gains by way of increased profits. All this, in a sense, has to be set off against the higher costs of, say, fertilisers and power costs. The important thing that needs to be kept in mind is that, as the government gets closer to elections, the chances of it being able to take important decisions get that much slimmer. Getting an independent regulator, such as the CERC for electricity, to issue a discussion paper on this and then get various opinions before arriving at a ruling may be a viable solution in case the EGoM is hesitant about taking a decision.

 
 

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