Just when it seemed that stable fuel supply linkages to the domestic power sector were crystallising comes the double whammy of lower domestic gas availability (mainly from the Krishna-Godavari basin) and higher prospective price of coal imports due to a global surge of “resource nationalism” in countries ranging from Australia to Indonesia. The downstream effects are beginning to be felt, particularly in the domestic power and fertiliser industries. The reverberations across the economy will be severe, with end-users being forced to simultaneously confront supply constraints and higher prices. The discovery of huge quantities of natural gas in the Krishna-Godavari (KG) basin, mainly Reliance Industry Limited’s (RIL’s) D6 gas field, ushered visions of a North Sea-style oil- and gas-powered growth, particularly in the power and fertiliser space. Recent announcements ranging from stoppage of work on current projects and paring of expansion plans owing to the uncertainty over future supplies symbolise the unravelling of an economic agenda that portended much for the regional economy.
The biggest disappointment has been RIL’s inability to meet targets. While RIL is admittedly only one of many producers in the KG basin, it is by far the largest and as such its performance expectedly does a lot more to drive sentiment compared to smaller players. While an earlier company announcement admitted that the proposed target of 80 million standard cubic metres per day (mscmd) by 2014 would not be met, current production has actually fallen to just 40 mscmd. This is a cause for serious concern. What explains the shortfall? First, the geology in the KG basin is more complicated than assumed. Second, RIL has drilled only 18 wells (against an expected 27 by this date), which would provide a partial explanation for the lower output. Third, RIL and domestic producers have limited experience in very deep sub-surface exploration. The recent tie-up between RIL and British Petroleum is expected to help bridge this technology deficit and accordingly raise output, though the benefits will not materialise immediately.
The decision by the governments of Indonesia and Australia to sell coal at “market prices” symbolises an aggressive rent-seeking behaviour that can only be expected to increase from here as producers exercise their market power. This will certainly have an adverse impact on the bottom lines of power producers, whose expansion plans depended on a steady supply of imported thermal grade coal obtained through long-term contracts. Independent power producers who won their domestic power supply contracts under tariff-based bidding and are, consequently, forbidden from passing on the cost increases to consumers will be especially affected. The Association of Power Producers (APP) has already lobbied the government to allow producers to raise tariffs to compensate them for this unforeseen increase. The government’s position is unenviable: agreeing to the APP’s demand would mean the price increase would be transmitted right down the line, while a refusal to do so would reduce the incentives for private participation, a highlight of the power sector’s recent performance.
Resource prices will continue to play an increasingly important role in ensuring uninterrupted fuel supply. Gas prices in India are currently far lower than global prices, which discourages entry. Similarly, a rationalisation of international coal prices is unavoidable. Economic growth in the years to come will have to be predicated upon this “new normal” in resource prices.