Getting it right on gas PDF Print E-mail
Friday, 09 August 2013 00:00
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Channelising investments in the sector is vital

Given their big differences, it is ironical that the Parliamentary Standing Committee on Finance headed by BJP leader Yashwant Sinha should reiterate the same point made by the finance ministry under P Chidambaram on Reliance Industries Limited’s KG Basin gas fields. While the finance ministry had written a note last month saying RIL should make good the ‘shortage’ in its gas production at the existing $4.2 per mmBtu price and not get the higher Rangarajan formula-based price for this, the Parliamentary Committee has made the same point. Whether or not the government can penalise RIL for this ‘shortage’ is not clear since nowhere in RIL’s Production Sharing Contract with the government is the clearance of investments made by RIL specifically linked to the recovery of a pre-specified amount of gas. And it cannot, since the purpose of allowing oil companies cost-recovery for investments they make—all of which are pre-cleared by the management committee which has government representatives—is to help de-risk the process of oil exploration. This, however, has not stopped the government from going ahead and disallowing RIL $1.8 billion of expenses due to this citing certain clauses in the Production Sharing Contract—RIL has, in turn, invoked the arbitration clause citing some of the very same clauses.


In addition, the Parliamentary Committee has argued the Rangarajan Committee’s formula-based price appears too high. In the event, it has asked for a scientific cost study to determine whether such a higher price is warranted. The problem with the recommendation, if a dissent note in the Committee’s report is to be believed, C Rangarajan was not even called to explain how he had arrived at his conclusions on the new gas price formula. More important, since the ultimate aim has to be to get more gas production in the country—India loses much more than the higher prices to be paid to gas producers like RIL by way of importing LNG which costs much more—the Committee needed to have spent more time on finding solutions for this. The same dissent note points out that ONGC, a leading PSU gas producer, was not called to give its view on what it will cost it to find gas in the deep waters. While the Committee gives the costs of producing gas for ONGC in FY12, these are all old fields; what is important is the cost of finding gas in the deep seas since this is where the potential new finds are. The petroleum ministry’s press release of July 5 said even PSUs like ONGC and OIL had said a price of under $7 per mmBtu would not be viable—Rangarajan’s price works out to a little under this. It is unfortunate the Parliamentary Committee missed the larger point.


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