The pricing of a mineral resource has never been so contentious as in the case of RIL’s KG basin gas. This is partly due to the volumes, capable of meeting half the gas shortage in the country, and the consequent politicization of the issue. Adding fuel to the fire is a poorly drafted production sharing contract, which allows for varied interpretations.
Against this backdrop, the eGoM recently arrived at a decision on the price issue, but there’s still much confusion about the applicability of the finalized formula. Indeed, the very fact that the minutes of the eGoM are not in the public domain, but seemingly a premium document makes its decisions open to much misinterpretation. The answer lies in the government lending clarity to its decisions—both on the terms of the RIL deal and on communicating the same in the public domain. For, at stake is a premium public asset; the country’s natural gas resources.
While there’s been much debate at each stage of the evaluation of the gas price formula—right from the cabinet secretary’s note through the Economic Advisory Council (EAC) and finally, the eGoM, it is the last that is significant now, being the final word.
What has the eGoM done? First, it has arrived at a formula applicable for the first five years after the Reliance KG basin gas hits commercial production next year, having taken into account recommendations of the EAC and others. This means that after five years, the price basis is re-opened for revision. Second, it has determined the lowest price that it will approve for the other 160-plus contracts in operation in the domestic exploration business under the new exploration licensing policy (Nelp). Third, it has said the price discovered after the latter formulae get approved will be uniformly applicable to all user industries (industry, power, fertilizer, et al.).
Now, cut to the specific formula—which works as a basis for fixing the price—there’s a constant number, a non-biddable component and a part that will be bid out in the marketplace. The first is fixed (at $2.5, derived from the administered gas price applied for non-Nelp projects such as ONGC’s) and applies to all other gas projects up till Nelp VI. The second is indexed to crude prices (where crude price is capped at $60 a barrel, so anything above that doesn’t translate into a benefit for the producer). The third, a biddable number C, has been kept at zero for the instant case, but will be freshly determined as a positive number for other price discovery processes.
In other words, the eGoM has apparently arrived at a politically acceptable solution of a highly controversial issue, by getting the instant case pricing lowered to $4.2 per mBtu from the submitted $4.33 per mBtu. It has, apparently, maintained sanctity of production sharing contracts by retaining the concept of bidding by gas buyers for future price discovery. It has also, apparently, not given in to any political pressures that may have come in for letting the power and fertilizer sectors get the gas cheaper than other sectors.
However, there seems to be a window left open for political manoeuvring—according to the eGoM minutes, the government is still to decide if it will extend the administered pricing for natural gas for the fertilizer sector or provide subsidy to it through the Budget. This is too ambiguous.
The next big concern is that of allocation of the gas. As its press release said, “The eGoM will take up issues relating to commercial utilization of gas under Nelp in due course.” But directing how the gas will be sold to user industries doesn’t uphold the concept of price discovery allowed in the contracts. True, the gas market is not well developed, but it will mature in time as gas pipeline connectivity expands and the consumer profile becomes more broad-based. The eGoM would do well to keep that in mind.