The Andhra Pradesh government and Reliance Industries Ltd (RIL) have been at loggerheads over the pricing of gas from the Krishna-Godavari (KG) basin, which will be ready for supply to consumers from July 2008.
The Mukesh Ambani-run RIL has proposed to sell gas at $4.33 (Rs174) per million British thermal unit (this is the landed price of the gas and the market price for customers could be anything between $5.2 and $6.2 per Btu).
While Reliance Industries ‘favours this market determined price for the gas, the Andhra Pradesh government says that there can be no “competitive bidding process” in a situation where the product is in huge shortage and the supplier is a monopoly.
That the issue has acquired a high profile is evident from the fact that Andhra Pradesh chief minister Y.S. Rajasekhar Reddy has written 20-odd letters to the Prime Minister on the subject.
The committee of secretaries (CoS) constituted by the Prime Minister has submitted its report and is understood to have favoured a regulatory body with powers to determine the formula for pricing gas.
However, petroleum minister Murli Deora has recently informed Reddy that the government’s intervention is not possible in gas pricing as India’s new exploration policy guarantees market determined prices to companies taking the risk of investing in the country’s oil and gas hunt.
The demand of the Andhra Pradesh chief minister for a regulated gas pricing was also voiced by the Anil Ambani Group.
Unconfirmed reports also suggest that Ambani has proposed setting up a mega gas-based power project at Kakinada, offering power to the state at below Rs2 per unit provided the (landed) gas price was kept under $3 per mBtu (million British thermal unit).
That many of Reddy’s missives came days after his meeting with Anil Ambani raised eyebrows. The issue of gas pricing has escalated into a corporate war; politically, the issue has divided sections of the ruling United Progressive Alliance and the Congress party itself.
The chief minister has informed the party bosses in Delhi that if the state government is not offered gas at lower prices, it will result in an increase in cost for consumers, which the state government cannot afford because Andhra Pradesh is due to go to polls in 2009 along with the Lok Sabha polls.
In the present Lok Sabha, the Congress has 29 MPs (the highest from one state) from Andhra Pradesh and the state will be crucial to its hopes of returning to power at the Centre in 2009.
The Andhra Pradesh chief minister enjoys considerable clout with the Congress leadership and the party is pinning its hopes for a good performance in 2009 on him.
Reddy is already facing severe pressure from the Left parties and the Telugu Desam Party (TDP) in Andhra Pradesh on many fronts.
His popularity has taken a severe knock in recent weeks due to his verbal assault against the former chief minister, Chandrababu Naidu in the assembly and the firing in Khammam district that killed six persons demanding distribution of land to the poor. Reddy rode to power promising free power to farmers, a promise he has kept so far. As a result, the power supply situation in general, and for agricultural sector in particular, has worsened drastically in the state and the government’s failure in this area has emerged as a salient issue in the state.
In addition, steep increases in the prices of LPG (liquefied petroleum gas) have made it unaffordable for a large section of rural women who were given inexpensive connections during the TDP regime. Thus, meeting energy needs of the state’s populace has become a political imperative for the Rajasekhar Reddy government in the state.
Andhra Pradesh needs 10 million cu. m of gas a day to operate four power plants that were sanctioned by the Centre in 2000. The state’s representatives claim that the four power projects that will yield 2700MW of power have been idle because gas has been scarce. The state government also hopes that the gas from KG basin will help meet cooking gas needs of all towns and many of its villages at a much cheaper level than LPG.
The Union government has to address the concerns of some global majors who have written to it warning that any changes to the production sharing contract and critical provisions such as market pricing for gas may erode the confidence of international companies to invest in the exploration business which is “risky” and “hugely capital-intensive”.
It is to be watched whether the issue will be settled soon or become a long-drawn battle. Unfortunately, it appears that the interests of the public at large will not guide the policy regarding the pricing of this scarce natural resource. What will matter is an attempt to balance the interests of the corporate sector, on the one hand, and the UPA’s political interests, on the other.
G.V.L. Narasimha Rao is a political analyst and managing director of Development & Research Services, a research and consulting firm in New Delhi. Your comments are welcome at firstname.lastname@example.org