Separate pricing for deepwater and other gas
Given the nature of the questions raised by the Supreme Court, the doubts raised by those that petitioned the court to quash the price hike, as well as the reactions of several BJP worthies such as Arun Jaitley over how the prices needed revisiting, the controversy over hiking prices of natural gas isn’t going to go away in a hurry. It is true that, at the moment, the benefits to ONGC will be a lot higher than they are to Reliance Industries—ONGC produced 65 mmscmd of gas in FY13 versus RIL’s 13.5 mmscmd—but that could change if Reliance is more successful in finding gas in the future. What makes the price hike controversial is that few understand the numbers and the huge differences in them. So, for instance, ONGC supplies gas from some fields at as low as $2.5 per mmBtu and as high as $5.25 from others; in FY12, India imported some quantities of gas at $6.97 per mmBtu but others at as much as $17.44. If this isn’t bad enough, the Rangarajan formula includes US prices (Henry Hub, in jargon) at $3.7 per mmBtu but also Japanese imports at $16.4. And, in between, as the court has asked the government, Reliance Industries’ partner Niko has a gas block in Bangladesh from which it supplies gas at $2.34 per mmBtu.
Explaining the difference in prices is complicated since there are a variety of factors at work—Japan is very far away from the supply source, so its price has a big transport component. Some of the fields are on land, or in very shallow waters—Niko’s Bangladesh field is an onshore one—and so produce at lower costs. A study by global consultants IHS Cera had estimated that 85% of India’s natural gas resources were only viable at prices of over $10 per mmBtu. How much higher also depends upon the depth at which the fields are located, and how much gas there is in them—the more the gas, the greater the ability to spread the costs over the number of units produced.
There are various ways to deal with the plethora of prices. One, which is what Rangarajan did, and which is the most free-market way to go—give a uniform flat price for all producers and, over a period of time, move towards free-pricing. Two, have separate pricing for different types of fields—a lower one for on-land and shallow water blocks and a higher one for deeper water blocks. The latter will help resolve some of the controversy since there will be no windfall gains for producers—in the case of the power sector, where costs also differ widely across plants, regulators take this into account while fixing prices. Of course, for future gas blocks, even if uniform free-market pricing is adopted, this won’t really matter since the onshore blocks will typically get bid out with higher revenue-shares for the government, ensuring the bulk of windfall gains will get captured by the government.