May 2014

Oil and gas in the capitals

Gas pricing issue in India has become complex
Raj Kanwar / Contributing Editor


The pricing of petroleum products, including gas, has always been a tricky issue in India; even an increase of 50 paise per liter in the price of diesel or gasoline or for that matter kerosene becomes a ‘Breaking-News’ on news channels. So when India’s Cabinet Committee on Economic Affairs (CCEA), headed by Prime Minister Manmohan Singh, gave in June 2013 its seal of approval to the proposed doubling of the price of the domestic natural gas from $4.2 to $8.4 mmBtu with effect from April 1, 2014, it had virtually touched a hornet’s nest.

Since it did not directly impact the common man, there were no public demonstrations or vociferous protests. However, many newspapers and news channels came out with scathing comments. A Communist Party of India law-maker Gurudas Dasgupta took the lead and filed in the Federal Court a public interest litigation accusing the political establishment of ulterior motive, collusion and mala fide. The Common Cause, a highly respected not-for-profit organization, too filed a petition broadly on the same lines. India’s corporate giant Reliance Industries Limited (RIL) had also been made a respondent. The petitioners have also sought the cancellation of the RIL’s contract in the Krishna-Godavari (KG-D6) block and asked for imposition of penalty on RIL for its failure to adhere to the contractual commitments.  However, in a 51-page affidavit, filed in the Federal Court, RIL described as “baseless and with-out an iota of substance” the allegations leveled by Dasgupta.

The ongoing parliamentary elections in India also managed to add additional political twist to the controversial increase in the price of natural gas. The Aam Admi Party, the new kid on the electoral block, too made it a top election issue openly accusing the government of selling the country’s interest to RIL. As a result of the intervention both by judiciary and chief election commissioner, the implementation of the price increase has been deferred until after the elections.

There is, however, a piece of history behind why the Indian government gets involved in determining the prices of petroleum products. It is a system called Administered Pricing Mechanism (APM), which enables the government of the day to periodically fix and re-fix prices of the various petroleum products based on a given formula. It had been the sad legacy from those “good old days”  when the diktat of “socialistic pattern” ruled the roost in the country.

However, way back in January 1995, the Federal Ministry of Petroleum and Natural Gas had constituted a Strategic Planning Group (commonly known as the R-Group) that was entrusted with the task of the restructuring the oil industry in the country. One of its major recommendations was to the gradually phase out the APM and to let the prices of petroleum products be determined by market forces. Accepting this very sane and politically correct recommendation, the Federal government, vide a gazette notification dated Nov. 21, 1997, decreed the phasing out of the APM regime over a four-year period starting from April 1, 1998. And within four years to date, the full deregulation was to come into force.

Though in theory, the oil marketing companies owned by the Indian government were free to fix and re-fix the prices of their products as per the market forces, they, nevertheless, would take their cue from the Indian government. On other occasions, even the government would nudge these companies to effect a minor decrease here, or a small increase there, if political situation so dictated. Thus, despite the formal end of the APM regime, the Indian government continued to attract the odium of increasing prices, and thus, paying a political price.

The current gas pricing controversy has unfortunately acquired some extraneous baggage because of the ongoing elections and resultant politicking. There is a perception that Reliance Industries had deliberately undercut its production from KG-D6 field as it felt that the current price of $4.2 mmBtu was not viable, and that the production could be raised later when the new rate of $8.4 mmBtu came into force. Though Reliance has shown a remarkable overall performance in all of its operations worldwide for the preceding fiscal 2013-14, it nevertheless has shown an unimpressive result in its prized KG-D6 field from where its natural gas production was 47% lower at 178 Bcf than the previous year. Even the production of crude oil and condensate has fallen substantially. RIL’s CFO, Alok Agarwal, at a press briefing on April 18, however, attributed the fall in production mainly to “the geological complexity and natural decline in the fields and higher than envisaged water ingress.”

Here, it will be useful to note that India has had a multiple gas price regime during 2012 that ranged from $2.52 to $17.44 per mBtu. Gas production has come down since its cost of production is deemed high. Even ONGC has told the government that its deepwater fields would be viable only at prices of up to nearly $13 per unit. The latest price of imported LNG is reported to be in ex-cess of $17 that has scared some of the consumers. However, there are still many buyers willing to pay a higher price and be happy for it. There will naturally be an adverse effect in the public transport sector, where the higher gas price would make traveling expensive. However, it needs to be remembered that the days of cheap oil or cheap gas are long gone. Higher prices all over will now be the rule rather than the exception; these are the wages of development and growth that one has to pay. wo-box_blue.gif

About the Authors
Raj Kanwar
Contributing Editor
Raj Kanwar has been a journalist, a public relations and advertising professional, and a businessman during the course of his 56-year career. He has weekly columns in Indian national dailies to his credit, as well as the book, Upstream India, an ONGC-commissioned history of the company.
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