Price it right

Price it right
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First Published: Wed, Jul 04 2007. 12 19 AM IST
Updated: Wed, Jul 04 2007. 12 19 AM IST
The escalating debate on the price that Reliance Industries Ltd (RIL) should be charging consumers for its natural gas from next year doesn’t seem to be going in the right direction.
Instead of repeating the ideal long-term solution—deregulating pricing in sectors that consume large volumes of gas such as power and fertilizer— we would like to turn the spotlight on the immediate and prime concern: rather than determining principles to determine prices—competitive bidding—the government is getting into the business of fixing prices. A committee of secretaries (CoS) is meeting regularly to hear the views of the producer, backed by the petroleum ministry, and the consumers led by the power and fertilizer ministries.
Ironically, last year an official committee set out the terms for gas pricing. Its concerns then were valid: What if the producer declared one set of prices for determining profit petroleum (government’s take), and another for the market to determine its own profitability? The stance was to not interfere in market-based pricing.
So, why such micromanagement now? It is not as if this is the first time gas price is being discovered by the private sector. Over 10% of existing gas supply has been priced through a biding system approved by the petroleum ministry without a fuss. What makes this gas deal special is the sheer volume. To begin with, RIL will erase 50% of the shortages and, in a few years, double its production. So, not only will the consuming industries like to book capacities but also the price, using all their abilities. Fertilizer minister Ram Vilas Paswan is thus expressing concern to petroleum minister Murli Deora.
At the state level, no one feels the pinch as much as Andhra Pradesh—close to 2,300MW of power capacity is idling due to lack of gas, prompting state chief minister Y.S.R. Reddy to raise the issue with Deora. Fuelling the controversy is none other than Mukesh Ambani’s brother, Anil Ambani, offering free consulting to the consuming industries. Evidently, the situation got too hot for Deora—hence, the CoS, which will not only look at the price but also allocation of the gas. Clearly, a regress.
So, what should the government do? Retrace its steps and review issues on “first principles” basis.
For a start, it needs to recognize it has a commercial contract with RIL and its prime concern is to ensure RIL discovers the best price. The higher the price, the higher its take in the form of profit petroleum. Second, the government has no role in brokering a price between the seller (RIL) and the buyers. Consequently, it needs to advise Reddy, that his political pressure on the Centre to beat down RIL’s price is misplaced. Rather, as owner of distribution utilities in his state, Reddy should negotiate with the power generation companies purchasing gas from RIL. The maths for fertilizer companies is even easier—for existing capacities that burn costlier fuels such as naphtha, the fertilizer import price offers the ceiling. And for new capacities, the cost of setting up a plant in West Asia, where the feedstock—gas—is cheap and cart the fertilizer home.
In a price discovery process, the trade-off depends on how well have buyer and seller powers been exercised. It is known that the gas demand and supply situation in the country today spells acute shortages. And in such a situation, typically, the seller would have an edge in price negotiations. But a couple of conditions are constraining seller power here. One, RIL is not allowed to export its gas and, two, it faces infrastructure inadequacy to move its huge volumes. So, buyers could combine to exercise greater power. In the absence of a sector regulator, the government may do well to ask RIL to rediscover its gas price through a competitive bidding process rather than negotiating one. This way, investor confidence will not wane.
How can the gas price issue be solved? Write to us at views@livemint.com
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First Published: Wed, Jul 04 2007. 12 19 AM IST
More Topics: Natural gas | RIL | Gas price | Views | OurView |