State-owned gas utility GAIL (India) Ltd says it isn’t possible to streamline the price of natural gas sourced from different fields and sell it at a uniform price to all sectors, effectively opposing a plan by the petroleum ministry to move to a common price regime.
GAIL has submitted a report to the ministry stating that the different types of consumers and the different prices at which gas producers sell it come in the way of such a plan. Consumers include the power, fertilizer and petrochemical sectors and city households.
The utility’s report is significant because it was to have formed the basis for the sale of gas at a uniform price all over the country. Some analysts agree with GAIL; others say the government should not interfere at all and simply let the market determine gas prices.
Gas from the Reliance Industries Ltd (RIL)-operated KG D6 field in the Krishna-Godavari basin is priced at $4.20 per million British thermal unit (mmBtu), compared with $1.82 per mmBtu for gas produced by state-run Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL).
Gas from the BG Group Plc-operated Panna, Mukta and Tapti fields off the western coast costs $5.73 per mmBtu and Ravva gas off the Andhra Pradesh coast is priced at $5.50 per mmBtu.
“We have submitted the report to the petroleum ministry,” GAIL’s chairman and managing director B.C. Tripathi said. “Overall pooling (of prices) can’t be possible given the variety of consumers and different price points of gas. We have suggested segmented pools for power and fertilizer. It can be either separate or combined.”
GAIL’s report comes at a time when the government is planning to increase the cost of so-called administered price mechanism (APM) gas to around $2.60 per mmBtu. This will push up fuel costs for the sensitive power and fertilizer sectors, putting pressure on them to pass on the increase to consumers.
APM refers to the price of gas produced by ONGC and OIL from fields awarded to them on a so-called nomination basis, without auction.
The report is in line with a study by energy consultancy Mercados EMI, commissioned by GAIL, which had recommended different gas prices for different sectors, as reported by Mint on 18 February.
Petroleum secretary S. Sundareshan said in a recent interview to Mint that differential pricing was unfair to consumers.
“I am not saying there should be arithmetical equality, but approximate(ly) equitable prices all over the country (is desirable),” Sundareshan had said. “You could have a pooled pricing mechanism, which will be approximately having equal prices... Another solution which has great credibility could be that we could have sectoral pricing.”
Deepak Pareek, a Mumbai-based research analyst at Angel Broking Ltd, said it was difficult to implement a uniform gas price “with one of the difficulties being the maintenance of books”.
“The larger issue also includes increase in the gas cost for key sectors such as power and fertilizer due to expensive gases being pooled along with cheaper APM (administered price mechanism) gas.”
But U.D. Choubey, former chairman and managing director of GAIL, favoured a uniform gas price.
“There is a likelihood of pilferage in absence of uniform gas price across sectors on account of gas being taken for one purpose and being used for other—in the same manner as has been the case with kerosene,” said Choubey, who is now director-general of the Standing Conference of Public Enterprises, or Scope.
Some analysts take a third view—that the government should allow gas prices to be market-driven instead of being regulated.
“The multiplicity of gas producers and gas consumers, coupled with market intermediaries (gas transporters and gas traders) should give rise to a market-driven price for the commodity,” said Gokul Chaudhri, partner, BMR Advisors.
“This price may not be uniform, recognizing the varied location of the gas and the terms of trade, such as long-term gas supply as distinct from spot purchases. However, government intervention in determining and influencing alternate gas prices based on (the) category of gas consumer creates market distortions and undermines the freedom to market and the freedom to pricing,” he said. “Gas, like other fuel supplies, should be freed from such constraints.”
India has recoverable natural gas reserves of 119.55 billion cu. m and produced 32,847 million cu. m in 2008-09. The demand for gas from fertilizer and power units is expected to grow substantially.
India has a power generation capacity of nearly 157,000MW, of which 17,055.85MW is gas-based.