Without this, costly imports are the only solution
Petroleum minister Dharmendra Pradhan has done well to work on a solution to the vexed gas pricing issue and to link to increased market-pricing of gas—he told FE the proposal has been sent to the finance ministry since it has revenue implications. A quick decision is important for a variety of reasons. For one, as compared to a shortfall of 74 mmscmd right now, this is projected to rise to 117 mmscmd by 2019 when another 27,000 MW of gas-based power capacity will come on stream —if you take into account the needs of others such as city gas, the gap rises even further. As against this increased gap that has to be met by imports, there has been little fresh exploration for gas in the last one year—on May 9 last year, when Reliance Industries served its arbitration notice to the government, it had said it would have to put on hold $4 billion of investments in the current year; Reliance and its partners had planned to invest $8-10 billion over 2-3 years. Nor was it just Reliance that was affected; others like GSPC and ONGC also slowed their exploration activities as the government-fixed price of gas was simply not viable for work in the deeper waters.
Which is why, when the government decided to scrap the UPA’s Rangarajan-formula for gas pricing, it promised a premium for gas in deep and ultra-deep waters and in high-pressure-high-temperature areas. While the industry had, in January this year, proposed a price based on a discount to a basket of alternative fuels, Pradhan has come up with a new formula which allows gas producers to sell between 20% and 50% of their production at market prices, with the highest market-share for the deepest or the most difficult blocks. This is sensible in theory but very problematic in practice. For one, while the attempt should be to clean up the system, the new formula puts discretion back in the hands of the babus—a field can be at the fag-end of the deep water definition but be a high-pressure-high-temperature one, for instance; this will now have to be certified by a petroleum bureaucrat. Two, it is not quite clear what market-pricing means. Will a bid called for by the producer be considered a market, or will it be defined in the way Rangarajan did, by looking at prices in the countries from where India imported gas? If it is the former, it allows for prices to really jump since users with stranded power capacity, for instance, will bid high prices. The Rangarajan-definition of a market, though sensible, however, was rejected by the BJP and unnecessarily tweaked when it came to power.
Also, since the idea is to attract new investment, it is important to give investors clarity on the roadmap to completely market-determined prices—this has not been proposed as yet. Moreover, since the government decided that the premium would only be given for discoveries made after October 2014, this effectively means the price will not be available for various RIL, ONGC and GSPC blocks that have been discovered but where no production has been done so far—ONGC’s 98/2, which is next to RIL’s existing 98/3 block in the KG Basin, for instance, is estimated to hold 3.5 trillion cubic feet of gas. If the government doesn’t relax this decision, these fields will not be developed as they will not be commercially viable and, as it does today, India will continue to import gas at even higher prices. Nor does it seem likely that investors who are not being given higher prices for their current discoveries will invest money to explore for fresh gas—in the unlikely event of this happening, though, the earliest the fresh gas can be available commercially will be 6-7 years.