Union petroleum minister M. Veerappa Moily recently announced that a uniform gas pricing policy would be put in place. Such a correction may boost investor sentiment. Domestically produced gas has to be sold at about one-third of what imports cost. Which is why the oil and gas exploration business isn’t too attractive to investors. However, the proposed policy needs to go hand in hand with one that suggests significant measures to develop the gas market.
This is because C. Rangarajan committee’s recommendations, which presumably will form the basis of the new policy, allow for future domestic production to be linked to international prices. This would, on average, bump up domestic prices to around $8 per mmBtu from the prevailing average of $4-5 per mmBtu.
The Rangarajan committee’s approach to pricing of domestic gas is based on two assumptions. First, there is no domestic market of consequence to allow for price discovery on a competitive basis. Second, in the interregnum, domestic producers are paid a rate derived from the average of prices recorded in large global trading hubs and that of domestic gas imports. The final price would be without costs incurred in “packing” (liquefaction) and transporting it.
This might not be the most efficient formula. Eighty per cent of imports are by public sector companies, and while their ability to negotiate might be aided by inter-government relations, they’re not really known to drive a hard bargain. This is a matter of relevance since liquefied natural gas (LNG) imports are set to rise significantly over the next few years—from 33% to over 40% in the next five years, according to 12th Plan estimates.
That said the formulation is an improvement over the current regime which seeks bids from domestic consumers that don’t have good enough infrastructure to access gas. Worse, regardless of the bids, gas allocation is made on a sectoral priority basis set out by the government.
Gas pipeline infrastructure is being set up by government-owned GAIL (India) Ltd. Clearly, this is not entirely a commercial activity since the pipeline commissioning might not be co-terminus with its usage by consumers, either in part or full.
This must be transferred to another agency which is solely in the business of pipelines, with a mandate to complete gas highways in record time, akin to the Power Grid Corp. of India Ltd in the power sector. It will spur genuine competition and lead to efficient pricing.
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