With elections in key states such as Gujarat and Himachal Pradesh behind it, the Union government proposes to raise the administered price of gas. This will increase production costs for public sector fertilizer and power firms and, consequently, increase the government’s fertilizer subsidy bill and power charges for customers in states such as Gujarat, Delhi, Andhra Pradesh and Tamil Nadu, which primarily use gas-based power.
The government’s plan involves raising the price of gas from the current $1.90 (Rs75.24) per million British thermal units (mBtu) to $2.50. While the exact increase in fertilizer subsidy could not be calculated, power costs in the states concerned could go up by 20 paise a unit; existing laws allow any increase in fuel cost for power companies to be passed on to the consumers. Around 10% of the power generated in India is gas-based.
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“The cabinet committee on economic affairs (CCEA) in its earlier meeting had said the gas produced from the nominated fields will get market price, provided the tariff commission says so. The commission has given its recommendations and made it clear that it is for the government to decide on it. The issue will now go back to the cabinet,” said a senior government official on condition of anonymity.
The tariff commission, which comes under the ministry of commerce and industry, is an expert body that looks at setting appropriate tariffs for different products and industries keeping in mind the larger economic interests.
“I have got nothing to comment on this,” said petroleum secretary M.S. Srinivasan.
However, another official at the ministry of petroleum and natural gas, who did not wish to be identified, said the tariff commission’s “recommendations have come in and the issue is under consideration”.
Of the 90 million standard cubic metres per day (mscmd) of gas available in the country, around 53mscmd is priced under the administered price mechanism, or APM, where the government sets the price of the product. Of this 53mscmd, around 48mscmd is produced by Oil and Natural Gas Corp. Ltd (ONGC) and 5mscmd by Oil India Ltd (OIL). All of this is sold to government-owned firms in the power and fertilizer business.
The oil firms have been demanding an increase in price to help them finance fresh investments required to improve gas production in these nominated fields and offset losses incurred by selling at a price lower than their cost of production. ONGC said it suffered losses of Rs600 crore in 2006-07 in its gas business. Officials at OIL could not be reached for comment.
“We are expecting the increase to come through in January. We are selling dirt cheap gas and have been asking the government to increase the price of gas for a long time. It is a fair and equitable thing for us to ask as even the costs of operations have gone up phenomenally,” said R.S. Sharma, chairman and managing director, ONGC.
The proposal to raise gas prices was first suggested by the empowered group of ministers, or eGoM, on gas pricing, formed to decide on the pricing of the gas being pumped out of the Krishna-Godavari basin by Reliance Industries Ltd. The petroleum ministry had informed eGoM that it would shortly submit a note to the cabinet asking for an upward revision of APM prices as reported by Mint on 15 September.
The government had, on eGoM’s recommendation, fixed the floor price of gas produced from the Krishna-Godavari basin at $4.20 per mBtu.
While any increase in prices would stem the losses for ONGC and OIL, it would also increase costs for the power and fertilizer sectors, putting pressure on them to raise their prices. The power and fertilizer sectors account for 40% and 29%, respectively, of the total gas consumption in India.
“With the APM prices being raised, the cost of generation will go up. In fact, for every $1/unit increase in the cost of gas, the electricity costs will go up by 33-35 paise per unit (kilowatt hour) depending on the dollar-rupee equivalent,” said T. Sankaralingam, chairman and managing director at NTPC Ltd, India’s largest power generation company.
“It would not affect us as it is a pass through for us. But it is for the state power distribution companies to take up the issue, as the price increase would have to be borne by them and, in turn, by the consumers. For the overall interest of the consumers, we will take up this issue with the government,” he added.
R.C. Gupta, deputy director general, The Fertiliser Association of India, an industry body, said the issue was similar for fertilizer companies. “An increase in APM gas price will be a pass through for the industry, but even so, we do not welcome it because it increases our dependence for reimbursement of the subsidy. The move will hit our bottom line as our funds will get locked until the subsidy dues are released by the government.”
According to the government’s revised estimates, the outgo on fertilizer subsidies is estimated at Rs45,500 crore in the current year.
India has a power generation capacity of 135,000MW. Of this 13,400MW is gas-based, and operates at 60% efficiency due to a shortage of the fuel. The country expects to add a generation capacity of 78,577MW by 2012, of which around 4,289MW will come from gas-based projects.
The demand for gas, from fertilizer and power units, is expected to grow substantially to 76.259mscmd and 89mmscmd, respectively, by 2012.
“Any increase in the APM gas prices will have a negative impact on the power sector as the power companies will have to pass on the fuel price to the consumer,” said Shubhranshu Patnaik, an executive director at audit firm PricewaterhouseCoopers.
(Udit Misra contributed to this story.)