The significant oil and natural gas finds in the Cauvery basin by Reliance Industries Ltd (RIL) reaffirm the high prospects of finding hydrocarbons in the country. It was first affirmed when RIL found large volumes of gas in the KG basin in 2002. This has strong implications for the domestic oil and gas market— the find may well be as large as that from the KG basin. So, given the recent controversies in gas pricing and allocation across sectors, the policy regime needs to be robust enough to avoid a repeat of the current set of confusions when Cauvery gas hits the market. The normal time for that would be five years, say, by 2012. The possibility of a shift in political equations at the Centre in the interim provides all the more reason to ensure that a suitably empowered regulator oversees the price discovery of gas. This, without political influences destabilizing the sanctity of contracts.
First, how different can these market conditions be?
While today, we face a serious gas deficit, by 2012, that will not be the case. The Planning Commission’s 11th Plan working group’s projections, largely based on KG basin finds, suggest this. Its report goes on to say that successes in other blocks would further augment domestic supplies. The chances of a surplus in domestic supply are thus strong, given the expected volumes of the Cauvery finds.
At the same time, the gas demand profile will have fairly matured over the period. For instance, the size of the retail city gas market—currently in its nascent stage—would have expanded significantly. Over and above consumption by households, demand from the transport sector would be higher, too. Now look at the bulk consumers—power and fertilizer industries. By 2012, one would expect a fairly deregulated market in power— hence, private sector interest in the generation business would be fairly high, as would be the incidence of supply deals being contracted by private players.
What are the implications? There would be a shift from the current situation where the public sector dominates, and as it tends to engage in long-term supply contracts, this shift to greater private play could mark a pick-up in the spot market for power, as well as merchant power capacities linked to power utilities. This could help make the market more liquid.
The relevance of natural gas in the consequently more “liquid” market would be higher —gas-based power generation plants have the technical ability to ramp up fast to meet sudden spikes in demand. In other words, it copes far better with peaking power demands, of course along with hydel, as compared with coal-based plants. So, as the value of gas-based power will be recognized better, there’s all the more reason to believe in the future of efficient price discovery of gas in the market.
As for the fertilizer industry, the other big user, logic points to the need for deregulation and targeted subsidies, instead of the current regime where delivery to intended beneficiaries—the small farmer—leaves much to be desired. Fertilizer firms should be able to take a commercial decision about producing abroad—say, in West Asia, where the lower cost of gas may justify this. Pricing reform here has to be only a matter of time with the gas market evolving and the policymaker’s pen needs to prevail over the politician’s cap.
Moreover, the cause-and-effect equations for pricing across industries, and stronger interlinkages as the markets mature, underline the need for an integrated energy regulator to oversee the discovery of reasonable pricing and prevent abuse of market power. Finally, with better prospects confirmed, the government should consider if it still needs to support the contractor by letting him recover costs before paying out its share in the revenue. With big discoveries in sight, greater momentum on fixing regulatory gaps seems sensible.
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