Tapping the true value of gas

Tapping the true value of gas
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First Published: Wed, Jul 25 2007. 12 48 AM IST
Updated: Wed, Jul 25 2007. 12 48 AM IST
The huge gas reserves tapped by Reliance Industries (RIL) in the offshore KG basin can supply up to 120 million cu. m of gas per day, an amount that can power 15 Dabhol-sized power plants and more than double the country’s gas production. The impressive quantum has justifiably received much media coverage. But there is an equally large and rather grave absence of another TAP—transparency, accountability and participation.
The most debated aspect of the KG basin gas is its pricing. When the “market-discovered pricing formula” —depending on the dollar exchange rate and prevailing crude prices— was first unveiled, the rate quoted was $4.79 per mBtu at the wellhead, while the current quote is around $4.4 per mBtu. Add another $1.5 for transportation, etc., and we are talking of a consumer price of about $6 per mBtu.
Not surprisingly, Reliance Natural Resources Ltd and National Thermal Power Corp., which had prior (now disputed) agreements for the KG basin gas at $2.9 per mBtu don’t want to pay the higher “discovered” price. The department of fertilizers is crying foul that fertilizers will become prohibitively expensive. Andhra Pradesh, with 1,500MW of gas-based power plants lying idle, is not amused at the cost quoted for gas found in its backyard. The Union government is, at best, confused and indecisive, evident in daily statements from different quarters. Meanwhile, RIL claims its price has been arrived at fairly and is below prevailing global prices.
The current status: The formula has been approved by the ministry of petroleum and natural gas (MoPNG) and a special Committee of Secretaries, and awaits ratification by the Energy Coordination Committee chaired by the Prime Minister.
Sadly lost in this din are the larger issues of governance and policymaking. Natural gas reserves are a national asset belonging to all citizens. Therefore, all policies related to its production, pricing and utilization must maximize the benefits to its “shareholders”, namely the citizens. This, however, doesn’t appear to be the case.
The least one would expect is transparency. But the production-sharing contract between the government and RIL was not made public. The basis for allowing RIL’s investments, a crucial factor in determining the public share of profits, to go up from $2.5 billion to $5.2 billion or more, is unclear and the MoPNG has recently said it will review the decision. The date when production will begin and the production schedule have been fluctuating. Given this lack of transparency, informed public debate about the relative pros and cons of the different decisions, including pricing, is not possible.
Another interesting question about the “market discovered pricing” is whether a market exists at all. The recent natural gas find by RIL in the Cauvery basin brings its share of the natural gas reserves to about 35 trillion cu. ft, or about 85% of all the gas discovered under the Nelp scheme! Add to this the fact that RIL is poised to enter the gas transmission business and, according to latest reports, the fertilizer business—a key consumer of gas. From this it is apparent that currently there is neither a free multi-supplier market on the gas supply side, nor sufficient independence in gas production, distribution and use. When the market is as imperfect, “market-determined prices” can’t be perfect. The need of the hour is an independent, transparent regulator who can protect the interests of producers and consumers alike.
Given the prevailing demand-supply gap, it is strange to see that the government has failed to articulate a policy on gas utilization—but a significant part of yet-to-be-produced gas has been committed to different parties or sectors. A key question here is why has India not set up systems to promote distributed co-generation using gas—it is known to provide more than 80% energy efficiency, while the figure is about 45% in a centralized power plant. This approach would help maximize energy efficiency, not the trend of increasing stranded assets such as malls and large commercial complexes that instal inefficient electrical cooling and heating.
Finally, taxation and subsidies— tools of public policy in the hands of the government—should encourage industry to move in a socially desired direction. Yet, ironically, without outlining any public policy, none other than the deputy chairman of the Planning Commission suggests a higher tax on coal in order to make a higher price for gas competitive!
All this points to is a serious void in policymaking with respect to natural gas. The way forward is for the government to put all the cards related to gas and oil on the table and invite all stakeholders to examine them. Such a step is critical to assure citizens that the energy policy of the country is not dominated by considerations of corporate interests, but by the interests of society.
This approach can then lead to policy measures that are adopted in a transparent and participative manner so that it protects broad public interests such as ensuring reasonable energy prices, reasonable (but not excessive!) profits to contractors, limiting the subsidy burden on state and Central governments and making best possible use of available energy resources. The fundamental principles of TAP—transparency, accountability and participation, the cornerstones of any democratic process—must be adopted while dealing with all issues related to the public assets of oil and natural gas.
Ashok Sreenivas and Girish Sant are with the Pune-based Prayas Energy Group and work on governance, policy and consumer issues. Comment at theirview@livemint.com
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First Published: Wed, Jul 25 2007. 12 48 AM IST
More Topics: RIL | KG Basin | Views | TheirView |