Gassing policy debate PDF Print E-mail
Thursday, 13 February 2014 00:00
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Sane decision-making gets demonised once again

After paying scant attention to detail while asking for cancellation of the two BSES electricity distribution companies in the capital, Delhi chief minister Arvind Kejriwal has done it again. This time around, he has asked the state’s anti-corruption bureau to file an FIR against petroleum minister Veerappa Moily and his predecessor Murli Deora along with Reliance Industries Limited (RIL) chairman Mukesh Ambani for their role in hiking prices of natural gas. And, for good measure, Kejriwal has said that while RIL will get a price of around $8.2 per mmBtu as compared to $4.2 right now, RIL’s partner Niko was supplying gas to the Bangladesh government at just $2.4 from its gas fields in that country. But just because an argument is seductive doesn’t mean it is accurate.

For one, it is not just RIL that will earn more money, so will the state-owned ONGC and the government itself—every $1 hike in gas prices, gives the government $550 million more by way of increased royalties, profit shares, higher dividend and corporate taxes, which means the $4 hike being talked of will give the government $2.2 billion more (R13,640 crore) each year. And the Bangladesh example doesn’t take into account the very different ground realities—Bangladesh’s gas is onshore while most of India’s gas is in the deep waters where costs are much higher. Which is why, as FE reported, even the state-owned ONGC made a presentation to the oil secretary several months ago where it said that it was not viable for it to drill in the deep waters at the current $4.2 price.

A study by consultants IHS-Cera, for instance, had pointed out that while India has 53 tcf of reserves, around 85% of this was viable only at prices above $10 per mmBtu. Indeed, while ONGC produces around 20mmscmd of gas from its onshore fields today, the cost of doing so is $3.75 per mmBtu, a number that is significantly higher than Niko’s $2.4 in Bangladesh. The amount of gas in each field also makes a difference. Though ONGC has not started production in its deepwater offshore fields, it produces 50mmscmd of gas from its shallow water offshore fields today at $3.5 per mmBtu—the price is lower than that for onshore production because the volumes in the offshore fields are higher. The anti-corruption crusading chief minister would also do well to look at another reality. That with India’s on-off policies on oil exploration—prices of natural gas were always supposed to be market-determined and there was supposed to be a tax holiday for exploration and development—the number of bidders, especially the private ones, is reducing with each bidding round. And the alternative to the Rangarajan formula that gives RIL/ONGC higher price of $8.2 per mmBtu is importing LNG at $12-14. And if, as McKinsey projects in a business-as-usual scenario, India’s energy imports rise to 50% of demand by 2030—from 30% today—this will have large consequences for the value of the rupee as well since the current account deficit will become a structural problem. The saving grace, though, is that, were Moily and others to allow this to happen by not raising gas prices, no one would hold them guilty. In this atmosphere where every corruption charge is taken to be the gospel, not taking a decision commands a premium.


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