Cash or kind? This could well be a question for those chasing bribes. But it has been making news for some time, for better reasons: Should the government take its share in the natural gas produced in the country under Nelp contracts, called profit petroleum (gas), as cash or, simply the gas itself? The trigger: RIL’s mega gas find in the KG Basin, which is set to hit the market next year. And recent reports indicate that the government is inclined towards the latter. Thus far, it has been taken in cash—the exchequer nets close to Rs5,000 crore on this count.
What is important in the emerging context is how the government will allocate this gas—primarily for large user industries, power and fertilizer. The big concern is that the decisions should not be held ransom to the pressures of political equations—both of Centre-state and among the ministries concerned at the Centre itself. For instance, Andhra Pradesh (AP) has close to 4,000MW power generation capacity idling for want of natural gas. It is not willing to pay the higher alternative cost of fuel—naphtha is more than twice the $4.33 per mBtu price quoted by RIL, while the imported gas carried as liquefied natural gas (LNG) is equally expensive at $9 per mBtu. AP also did not aggressively seek to meet all of its immediate demand in the market from RIL when the latter was scouting for consumers—in the hope, perhaps, that it would get a special dispensation on price and volume. Now, the state is making considerable noise and since the same political party is in power here as at the Centre, it may well stand a better chance at the profit gas.
The other pressure point is the Ratnagiri power project in Maharashtra (the erstwhile Dabhol), which does not have any firm supply of gas beyond 2009. So, the power ministry has suggested that profit gas be taken in kind and allocated to Dabhol “at affordable rates”. There would also be pressure from the fertilizer ministry, and that too, to supply to the industry at subsidized rates.
How significant is the profit gas? In the case of RIL alone, it is around 10% of the 40 mscmd to be produced initially, enough to fuel a 1,000MW power plant for 15 years. The pie gets bigger in the later years. Further, several large finds are heading for commercial production in the years to come—GSPC Ltd, ONGC Ltd and Cairn Energy.
It is not just the volumes. Domestic gas is cheaper than alternative imports as dedicated infrastructure is required to deliver gas from overseas (liquefication and then regasification at home). The relevance of profit gas is also set to grow because it will be seen as an easier way to ensure some fuel supply security than negotiating in the market with an RIL, or for that matter any other contractor.
The race for a share of the, thereby highly attractive, profit gas is likely to lead to escalating pressures on the government. How, then, should it allocate the gas?
The right thing to do would be to link it with a state’s progress in power sector reforms and not just hand it on a platter. Because, by holding this gas—that is value the government derives from the country’s natural assets—as a carrot, the benefits of the reforms thus encouraged would eventually translate to the consumers in the states.
What about fertilizers? Though the profit gas will be valued at market prices, the immediate pressure on government will be to supply it at subsidized rates. But that would only perpetuate inefficiencies. Since there are plans for a shift from the prevailing cost-based reimbursement system to an open-procurement (bid-based) one, the right way would be to auction the profit gas to the fertilizer manufacturers. That way, the most efficient producers will succeed in securing the gas supplies.
Given the trend of political resistance to reforms, will the government be able to deliver on these counts? Write to us at email@example.com