Tinkering with Rangarajan formula won’t work
With prime minister Narendra Modi now holding meetings on the price of natural gas, and oil ministry sources indicating that a decision will be taken over the next 24-48 hours, the question is what will be decided. All manner of possibilities are being touted, from using net calorific valuation instead of the gross calorie method suggested by the Rangarajan panel to a cost-plus regime where companies such as ONGC and Reliance are paid their costs in addition to a fixed mark-up. A host of other alternatives thrown up include just freeing up gas prices for new fields, removing Japanese prices from the Rangarajan formula and replacing this with the price of gas in Russia—the last is a suggestion from the Parliamentary Standing Committee that examined the matter some years ago, and something many top BJP leaders swear by.
Most of the objections have been dealt with by this newspaper over several months and are quite flawed. While much has been made of Rangarajan including Japanese import prices into the gas formula, since these prices are based on what is called a ‘netback’ basis—or the price the exporter gets—including Japan adds just $0.3 per mmBtu in the Rangarajan price of around $8.3. As for including Russian prices, it is worth keeping in mind the most recent Russia-China deal which values gas at anywhere between $11-13 per mmBtu. The cost-plus formula that the finance minister is reportedly in favour of has its own problems, more so since Reliance and the government are currently locked in a dispute over its costs—this will just add one more layer to that tricky problem. An elegantly produced coffee table book by Reliance adds another element to the story by pointing out its consortium has spent around $7.4 billion on various blocks—other than the contentious KG D6 ones—where no oil/gas has been found. Any cost-plus formula will then have to reimburse $7.4 billion before even one cubic metre of gas is purchased. Given how the exploration policy itself promised free-market pricing for gas—this is done for oil anyway—administered pricing could itself become another legal dispute. Raising prices for just the new blocks will ensure older producers like ONGC won’t get higher prices—apart from moving India back to an older dual-price regime, it may not help since, in any case, 50-60% of the higher gas prices come back to the government by way of royalties, profits, dividend and taxes.
It is also worth keeping in mind, as a recent Goldman Sachs report points out, while India’s net energy imports are set to rise from $120 billion right now to $230 billion by FY23—this assumes subdued global energy prices—increasing the share of gas from 9% right now to 16% alone could save $8 billion annually; globally, gas comprises 24% of energy consumption. Apart from gas pricing, the other issue India needs to look at urgently is of stability in policy—the 7-year tax-holiday for petroleum was arbitrarily removed for gas in FY09 and the Cairn-ONGC royalty-payment regime was unilaterally changed when Anil Agarwal’s group bought the firm. At the end of all the tinkering of the Rangarajan formula, what matters is whether firms will continue to explore for gas at a lower price, more so given how most of the gas is in very deep seas. While coming to a decision, the government would do well to revisit ONGC’s presentation, to the UPA’s oil secretary, on how it could not drill for gas at low prices; or to look at the number of gas finds the DGH has not cleared as they are unviable at current prices.