Govt may turn to ONGC, OIL for relief to power, fertilizer sectors: B.K. Chaturvedi8 min read . Updated: 17 Jul 2013, 12:48 AM IST
The member of the Plan Commission explains the rationale behind pricing domestic gas in dollars
New Delhi: The government could consider asking state-owned upstream explorers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) for a subsidy mechanism to soften the impact of the increase in the price of natural gas on power and fertilizer companies, B.K. Chaturvedi, member, Planning Commission, said in an interview.
Chaturvedi, a former cabinet secretary, was a member of the committee headed by C. Rangarajan, chairman of the Prime Minister’s economic advisory council, that recommended increasing the price of natural gas. In the interview, he also spoke about the rationale behind pricing domestic gas in dollars, the absence of a global open gas market, the dynamic nature of the new gas pricing mechanism, and disallowing the price increase to affect investments in other sectors. Edited excerpts:
There has been wide-ranging criticism about the increase in domestic natural gas prices. Some of the questions being asked are why the gas is priced in dollars, what was the urgency to decide on increasing the prices, and the impact of this on the power and fertilizer sectors. How do you respond to this criticism?
The gas prices in the case of Rangarajan Committee decision are not in isolation. One has to see that India is trying to develop its exploration sector and trying to get more oil and gas. And for this purpose we have awarded more than 200 exploration blocks to various players. Some of them have got gas like Reliance (Industries Ltd), some of them are hoping to get gas such as GSPC (Gujarat State Petroleum Corp. Ltd), ONGC and other players, and there are other players who are waiting in the wings. There are a large number of players who are working in this field.
When you work in this field, the government under Nelp (New Exploration and Licensing Policy) rounds makes certain commitments under the production sharing contract. Under these contractual arrangements, you have certain obligations—how are you going to fix the price, what will be the principles, among other things. The principles, which are inherent in all of this, are that it (gas price) should be based on the arms-length and will be based on market price and, in accordance with the policy of the government, it will be distributed. But by and large, the principle of it is that it should be based on market. Now, in case of oil, this is easy to do because it is decided internationally, shared internationally, the transport cost is very little and the price is very easy to determine. Therefore, there has not been any difficulty in that. Therefore, that’s not coming for criticism or any debate. In case of gas, unfortunately, the market is highly segmented.
If you take countries which produce a lot of gas such as Saudi Arabia, Qatar, Iran and others—they have one policy for their own domestic players. Or Russia, if you see the prices in their own market are quite different but then there are other countries such as the US, who have one price for gas as they have lot of gas. Then there are other countries who are importing gas, like Japan. There they have no gas at all so they have to import LNG (liquefied natural gas). So the prices in their markets are quite different. So, when the committee met, we said that there is nothing like an open gas market which we can say that, this is what is the gas market in India. Internationally also, there is nothing like an open market because this is a highly segmented market.
Therefore, we felt that we would have to take up what is the international prices available. India is both importing as well as having domestic production. Therefore, we felt that we will see the European market, we will see the American market, and the Japanese market. And since there is no production in the Japanese market, we said that whatever is the LNG, we subtract out of that whatever is the cost of gasification, liquefaction, transportation and other extra costs to arrive at the cost of gas which they are getting. So, we will see these three costs and average them out and we said that this is the general average of the international market price. Then, we saw what is the domestic market price in the domestic market. In the domestic market we are getting LNG from various sources and we said that, to that subtract the cost of liquefaction, gasification and transportation. We are talking of the LNG which have been received. So based on that we said that you should see, as ours is a dynamic pricing system. If the LNG prices go down and international prices go down, these prices also go down. If they go up, these prices also go up. It moves along with it. So, then they took the average of the two. So that way, we have tried to determine what’s the market price.
Now, one can argue that you must have another method of determining the market price. There can always be different methods. But to say that this method is unfair, I would not agree. I think this is in my opinion one of the fairest methods one could have come (up with), where one would have taken the international market, one has taken the domestic market and one has come out with the broad arrangement. Now, people are criticizing that don’t take the US market because that gas is not coming but that’s not the question. For that matter, the Japanese gas is going to Japan only and that LNG is not coming to India. But we are taking these markets just to ascertain what is the market prices in different international markets so as to know that those markets are segmented, what are the international market price on an average. And, therefore, we want to give to our players in the domestic market who are exploring the same price.
Why are we pricing domestic natural gas in dollars? This has also been articulated by the ministries of power and fertilizer and it has been argued that nowhere in the world is domestic gas priced at these levels.
What we have done is that we have taken the price established by the international market. Now you say that it is not marketed everywhere. You take the UK market; the gas price is much more. For that matter you take the Japanese market—it is far-far ahead. If you take any other market where there are shortages you will find this. Wherever there are surfeit, people are saying .. look, you take Russia. Well, these are countries which are surplus in gas. So, if India was to have a surplus of gas, certainly... That’s why when I said that you must have a market. That is how you determine the market. Now, as I said, to me this appears to be a very fair method.
People are saying it will have an impact on fertilizer, power. Well, certainly it will have an impact. As against that we should see that when you sign (a) Nelp contract, those are contractual commitments of the nation. If you say that no, no, that the gas prices are going to rise and I am not going to let it go beyond an A, B or C number because it will hurt me and as contractual commitments these are not important, I think then no one will ever sort of believe you when you sign these contract commitments and no one will then invest in your markets. Because people invest in your markets. This is not a question of gas alone. They will not invest in any other market because they will say though you sign a contract with India, they will renege on it pretty fast if it doesn’t suit them. So, that’s the point.
Now, the point is being made why fix up the price in dollars. Well, then why do international trade in dollars, why not do it in rupee. The point is that is how the international prices are fixed in dollars in different markets. If you are going to compare different markets then you have to have one currency and dollar is the obvious currency. I think that they have not fully appreciated the import of the contractual arrangement under the Nelp and its implications and I think that this point perhaps has not been fully appreciated.
So, how do you provide relief to power and fertilizer sectors?
As far as power and fertilizer sectors are concerned, the government will have to see, because as it has just been the case with oil and gas, where downstream oil companies have to be given subsidies, they are depending on the upstream companies. A lot of gas is being produced by ONGC, OIL and others. So, possibly the government may turn to them, because in their case also the prices have increased and those are blocks given on nomination basis and not on this basis (Nelp rounds). But for uniformity purposes, the government is fixing up the same price. So, the government might turn to them or the government might provide some other method.
So, at this point of time is the Planning Commission not involved in such an exercise?
At this point of time, in this exercise at least I am not involved.
One criticism is if the idea was to attract investments, why not make this pricing applicable for future blocks to be awarded through new Nelp rounds and not for those already awarded?
No, I must say that it is not a question of attracting new investments. New investments coming is a by-product. The main question is that you have signed a contract with A, B or C player. Under that contractual arrangement, what should be the price? Either you should have said that under this contractual arrangement I will first determine how much money you have invested and then I will give you returns.
There are many countries which do that. That they give you that gas is not yours, oil is not yours. Many Middle East countries do that and you have only an arrangement for being just a contractor and that’s about it. And the rest is you will get only 15% or 16% (return). We have not done that. We have got a Nelp contract which provides for this. Now, one can argue that you should have a different contract. If you have a different contract and then for this contract you will be governed by this policy. For fresh contracts, you can have a fresh policy.