A natural gas oligopoly2 min read . Updated: 25 Aug 2009, 09:50 PM IST
A natural gas oligopoly
A natural gas oligopoly
If there is one fuel that has the potential to prime India’s economic growth in the future, it is natural gas. An estimated 37 trillion cu. ft of reserves available can power the country for considerably longer than its oil resources. This, however, is dependent on the presence a right policy framework. If indications are anything, the government has botched our fuel future.
For any scarce resource, proper allocation can only occur through well-regulated markets. This happens when such a resource follows price signals. Distort the prices and you’ve ensured sub-par economic performance. In the case of natural gas, India is an oligopoly with two big players in the exploration and production (E&P) space and another two big players in the downstream, transmission and distribution (T&D) sector. The government, instead of striving for a more reasonable market structure, has abetted the creation of this oligopoly. It is not only a question of indulging in corrupt practices to favour one player over another, but that of a mindset that favours oligopoly. In such a situation, price discovery is impossible and price distortion a certainty.
Consider the facts. On the E&P side, just two contractors, Oil and Natural Gas Corp. Ltd (ONGC) and Reliance Industries Ltd (RIL), have won 62% of the exploration blocks that represent 79% of the acreage auctioned so far. ONGC has 59 fields and 397,000 sq. km and RIL 33 fields and 341,000 sq. km. In the T&D sector, again, there are only two significant players, Gas Authority of India Ltd (GAIL) and its subsidiary GAIL Gas Ltd and RIL and its subsidiary Reliance Gas Ltd. It does not matter if ONGC and GAIL are government-owned and RIL is a private entity: The market structure makes nonsense of price discovery.
What is alarming, however, is the fact that RIL is a vertically integrated entity: it is a big player in both E&P and T&D spaces. Even more alarming is the fact that the downstream sector regulator, the Petroleum and Natural Gas Regulatory Board has inspired no confidence in managing this problem. Unlike regulators in other sectors, it has little role in price regulation.
Here it is important to stress how the government’s mindset of “scarcity economics", something recently highlighted by chairman of the 13th Finance Commission Vijay Kelkar, has contributed to the mess. The government has a list of sectors it wants to allocate gas on priority. Fertilizer and power generation top this list. It has had to reserve natural gas for these sectors because they are in no position to pay spot-market determined prices as government controls their output prices. Thus the government reasons that if you cannot pay the market price, the commodity must be scarce. That is the road to oligopoly and inefficiency and not the path to prosperity.
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