The pricing of natural gas, which lies at the heart of the Mukesh Ambani-Anil Ambani dispute, is likely to get even more controversial in the days ahead as more natural gas supplies come on to the market. While the Ambani dispute is over whether the gas has to be supplied at $2.34 per mmBtu, the government has fixed a price of $4.2 per mmBtu for the Reliance Industries Limited (RIL) gas, based on a limited bid called for by RIL — this price is valid for five years starting April this year and is linked to the one-year average price of Brent crude. While $4.2 seems to have become a benchmark price for other gas fields as well, there are several other gas prices floating around at the moment (see graphic), from $1.8 for gas produced by ONGC (this is the so-called Administered Price Mechanism, APM, gas produced from fields that were given to ONGC instead of being won by them in competitive bids) to $3.5 for the Ravva field which is operated by Cairn India and $5.7 for the Panna Mukta Tapti fields operated by a consortium of British Gas, RIL and ONGC. In addition, there is regassified liquefied natural gas (RLNG) sold by Petronet LNG at a current average of $6.3.
With domestic gas supplies likely to rise dramatically, it is expected that gas will account for anywhere up to around a fourth of the country’s energy mix in the next five years. This is why the government has set up a committee to look into its pricing. The issues are simple: Keep the price of gas too low, and there is no incentive to produce (as is happening in the case of the APM gas produced by ONGC and OIL which, even after RIL started production, accounts for 38 per cent of the country’s gas production); fix it too high and there are cost and subsidy implications for user sectors like fertilisers and electricity.
Uniformity in various gas pricing regimes is also something that is being demanded by the fertiliser ministry on the grounds that the cost of production for fertiliser units varies a lot because of the cost of gas. The important point to be kept in mind here is that if prices of gas rise, this will affect around 35 per cent of the country’s fertiliser production — basically, urea which is produced using natural gas. Of the total of 21 million tonnes of urea produced, about 16.5 million tonnes is prduced using gas while the rest uses naphtha and furnace oil as the feedstock — since both these fuels cost more than gas, raising its price to $4-5 won’t really matter, indeed it will reduce the cost of the fertiliser. Each $1 increase in gas prices raises fertiliser prices by $22 a tonne — so that’s an increase in costs of around Rs 1,800 crore per annum for the 16.5 million tonne of urea that are produced using gas. In the case of power, it is estimated that a $1 hike in gas prices translates to a 40 paise hike in each unit of power generated — taking the transmission and other losses of around 30 per cent that translates to an increase in retail tariff of around 55 paise. Given that around a tenth of India’s generation of 800 billion units is based on gas, that’s an additional retail level tariff of Rs 4,500 crore per year — if the share of gas-based power rises, the impact will be greater.
| The Gas Market | |||
| Producer | Daily Production (mmscmd) | Price ($ per mmBtu) | Marketing margin (cents per mmBtu) |
| ONGC (APM) | 48.52 | 1.80 | Nil |
| OIL (APM) | 4.76 | 1.80 | Nil |
| Panna Mukta Tapti | 15.00 | 5.56-5.73 | 11.00 |
| Other JVs | 9.00 | 3.5 (Ravva) | 10.5 (Ravva satellite) |
| R-LNG including spot | 28.00 | 6.3 (current) | 17.00 |
| Reliance | 36.21 | 4.20 | 13.50 |
| Sector | Daily Supply (in mmscmd) | % of total supply |
| Power | 55.68 | 39.35 |
| Fertiliser | 43.46 | 30.72 |
| Sponge Iron | 9.69 | 6.85 |
| Petrochem, LPG | 11.69 | 8.26 |
| City gas & CNG | 4.43 | 3.13 |
| Industry & other | 16.54 | 11.69 |
| Total | 141.49 | |
| Source: Ministry of Petroleum and Natural Gas Every $1 per mmBtu increase in gas price increases cost of production of urea by $22 a tonne and power by 40 paise a unit. | ||
GAIL, which has been asked to do the study, is likely to hire independent consultants since it markets a range of gas produced from the APM ones to privately-operated fields, like Panna, Mukta and Tapti, besides selling regassified LNG which itself is available under two arrangements—long-term and spot. The study will look at the concept of pricing gas from all sources uniformly which could mean lower price for those industrial units that are using non-APM gas and higher price for those using APM gas.
Whatever the government decision on pricing APM gas may be, with the increased gas availability going to come from the private sector (APM fields are mostly getting depleted), so there is even the question of whether the government even has the right to fix/change gas prices under the Production Sharing Contracts (PSC) with the private producers — this, again, is one of the issues at the heart of the Ambani dispute. One of GAIL’s mandate is to see if, and how, a uniform gas pricing policy can be implemented. This right was challenged in the past when a pooled price mechanism for RLNG was introduced in order to tweak the natural gas price available to Dabhol power plant. Though pooled RLNG price led to protest from some customers since they were being supplied long-term Qatari gas, the government was able to introduce the pooled pricing mechanism. This created uniformity in only one segment of the gas market and variation in gas prices continued.
The study on uniform gas prices is also expected to reflect on the correctness of government’s price-setting powers and whether that flows from the Petroleum and Natural Gas Regulatory Board Act or whether a separate legislation is required.
When it comes to gas marketing, even though it appears to be free, the actual gas supply is based on a priority set either by the government or the court. For instance, in the case of gas from the Bombay High region which is supplied from Uran, it is supplied on priority for city gas distribution network in Mumbai, to heavy water plants and to power and fertiliser companies. In overall terms, gas supply, irrespective of which field it is being produced from, puts the fertiliser sector on top of the priority list. Sale of gas is also governed by the Supreme Court judgment that puts supply to industry surrounding the Taj Mahal and to city of Delhi in the form compressed natural gas (CNG) on a priority.
The levy on marketing of gas, called the marketing margin, has so far remained out of the purview of the government control with the ministry of petroleum and natural gas saying that it is left to the contracting parties to make a decision on it. As is the case with the base price, the prevailing marketing margins are more or less in the same range. For instance, GAIL charges 10.5-17 cents as marketing margin on all non-APM gas which includes gas produced from privately operated Panna Mukta Tapti. GAIL executives say it will charge a similar rate whenever it gets to market RIL gas. RIL, which charges 13.5 cents per mmBtu as marketing margin on the sale of gas has, however, invited criticism. If the government moves to uniform pricing, it may also need to look at symmetry in margins otherwise the end price may again show wide variations. The alternative could be to let the Petroleum and Natural Gas Regulatory Board regulate the margins.
Any uniform pricing covering all gas supply agreements will have to balance among various things, the rate of return for the operator of a field and the impact of gas price on the costs of user industry especially fertiliser and power, since the two sectors have their output subsidised. Besides, a crucial issue will be to put in place a mechanism for price revision. If the revision is left to a Cabinet decision, the resulting controls could lead to a situation where, for years, prices may not get revised.