Still in a cost conundrum

Still in a cost conundrum
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First Published: Thu, Feb 08 2007. 12 38 AM IST
Updated: Thu, Feb 08 2007. 12 38 AM IST
Petroleum minister Murli Deora recently announced that the Indian government is close to signing a deal, after nearly 15 years of negotiations, for the pipeline that is to carry natural gas from Iran to India—and would do so by June this year. Foreign minister Pranab Mukherjee is in Iran at present, where the talks on Iran’s latest price offer for it will be high on his agenda.
India has so far been uncomfortable about agreeing to pay more than $4.25 per mbtu (million British thermal units), due to worries that its downstream gas users may not find a higher price acceptable. It has been negotiating with Iran on a trilateral basis, with Pakistan being the third country at the table. Islamabad, however, has now said it is comfortable with Iran’s revised quote of $4.93 per mbtu.
Pakistan also seems to indicate it would go ahead on a bliateral basis—an Iran-Pakistan pipeline— if India were to disagree. But this fact must not become a pressure point for us—for Iran, the economies of the deal would kick in only when the pipeline reaches India. The time, in fact, seems right to question the economic logic of the proposal, as India has to revert to Iran within a month’s time. India’s demand for gas outstrips supply by 50%, and given its pace of economic growth, energy needs are certainly on the rise. Yet, this alone is not reason enough for the government to take a blind plunge into the deal in question. The pricing has to be right.
Is the consumer willing to pay this price or are there cheaper options? Large consumers such as the power sector may not be too enthused. The revised quote implies a delivered cost at Indian borders of more than $6 per mbtu, which will render gas-fired power stations unviable for the most. This, since, a back-of-the-envelope calculation shows that gas-fired power will cost close to 50% more than coal-fired power.
Agreed, there are distortions in the domestic coal market—prices are controlled and not linked to global prices. But the recent bids for ultra-mega power projects show that captive mining-based projects deliver power cheaper than those that procure coal from state owned Coal India ltd, in which prices are controlled. If anything, the absence of deregulation in coal only imposes a constraint on mine development.
Given this clear evidence in favour of coal-fired plants, has the government identified large consumers to ensure the viability of the Iran gas deal? No. In the power sector, for the 11th plan period, the government plans to set up only 2,000MW of gas-fired capacity against the total target of 68,000MW.
In the fertilizer sector, where gas is a feedstock, the prospects are better. This year, we had to import 5 million tonnes of urea. But, instead of setting up fertilizer plants in the country, it may be far cheaper to set up a gas plant at the well mouth and bring home the urea. So, in the absence of large buyers, for the government to secure gas in volumes big enough to fire 20,000MW of power seems questionable.
Yes, there is the geo-political context. A gas pipeline through Pakistan will help de-escalate its tensions with India and promote trade and commerce, a measure that will aid the pursuit of peace and harmony. And an economic relationship with energy-rich Iran will be beneficial in the long run. However, the gas deal is not a common melting pot—its commerciality must stand out.
Entry of high-priced gas will also have a sympathetic effect on the evolving Indian gas market, where large supplies are scheduled to come on stream from domestic sources over the next few years. Hence, the risk of distorting the market and inflating the energy bill of the country cannot be ignored.
A knock-on effect of a high energy bill is worth visiting—for an inclusive economic growth process, manufacturing holds the key. But globalization has meant that every cost element, particularly of power, needs to be competitive. Government, therefore, needs to revisit the basic viability of the Iran gas deal from a consumer standpoint before taking a call.
Should India agree to the latest price offer by Iran for its gas pipeline deal? We welcome your comments at views@livemint.com
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First Published: Thu, Feb 08 2007. 12 38 AM IST
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