Sunil Jain: Too much gas

RATIONAL EXPECTATIONS

Given how large the impact of the price cleared by the ministry of petroleum for selling Reliance Industries Ltd's (RIL's) gas from the Krishna-Godavri (KG) basin will be, it's not surprising the government has set up a Committee of Secretaries (CoS) to deliberate on the matter. While the ministries of fertiliser and power are arguing that allowing RIL to charge a higher price will sharply increase prices/subsidies of fertliser/power, their arguments are not restricted to RIL alone. For starters, the RIL price will have to be accepted as the price for all KG basin gas (this is where both ONGC and GSPC have also made very big finds); once RIL's price-discovery process (more on this later) is accepted, it opens the way for all gas producers to ensure significantly higher prices for their product""an increase in gas price by $1 per mmBtu increases power tariffs by 54 paise per unit and the fertiliser subsidy by Rs 4,000 crore per year.

The ministry of petroleum appears in favour of the proposal, arguing that if RIL charges a higher price, the government gets greater revenue as its share of profits. The ministry of finance loses from more subsidies, but gains from more profit-gas (theoretically both are the same, but that's not really so since the extra amount the government gets from profit-gas is under a third of the extra revenue got from selling gas at a higher price). And there are probably the reformists (from the finance ministry?) who argue that investors will come into the petroleum sector only if free pricing is allowed, that you can't penalise oil/gas suppliers just because power/fertiliser pricing is not free; and so on.

Presumably the government's hope is that the CoS will cut through all this and arrive at a consensus price. How this will happen is unclear since there are 4-5 prices floating around, all of which are dramatically different, and underscore the fact that there is no real market for natural gas. The administered price for gas for the power fertiliser sector is around $2 per mmBtu, Panna Mukta Tapti gas is sold at around $4.75, Petronet LNG sells to GAIL at around $3.85 as part of a long-term contract but even sells spot gas at over $12!

So how should the CoS look at fixing the right price for RIL's gas? Despite what this will mean in terms of higher power/fertiliser prices, a market-determined price is the best one. For one, this was promised under the new exploration policy; two, moving to international pricing is desirable and has been done in other areas with visible benefits. As for the problem with power/fertiliser prices, this is something the government needs to tackle""one way could be to take its share of gas from Reliance and others and give this to the power/fertiliser sector at a subsidised rate.

That said, the issue is not that straightforward, since there are market prices and there are market prices. In 2003, the public sector NTPC floated a global tender asking for supply of gas to its 2,600 Mw Kawas and Gandhar power plants for a period of 17 years. Companies from all over the world bid for it, but RIL won the bid, to supply gas from its KG basin, at a price of $2.34 per mmBtu (plus another 70 cents per mmBtu to deliver it to NTPC at its plants). Having won the bid (and after NTPC told other bidders, such as Petronas, to go home) and been awarded the letter of intent, RIL said it wanted some drastic alterations, which NTPC refused, and the matter is in court. So, here's an international bid, and for some reason the ministry of petroleum refuses to insist this is the true market-discovered price. It's true, prices of gas and of drilling equipment have changed dramatically since 2003, but a contract is a contract""Qatar still supplies to Petronet at the pre-agreed price though it has fresh contracts at different prices.

What of the price RIL now wants and how was it arrived at? The problem with this, as the Anil Dhirubhai Ambani Group has pointed out, is that the new tender was nowhere as robust as the NTPC one. For one, it was not an open bid of the NTPC type and just selected buyers were invited to quote; RIL set a floor price of $4.64 per mmBtu (roughly double the price at which it won the NTPC bid). While the ADAG group has pointed out several more critical flaws in the bidding, the larger point is that if the CoS is to accept this as transparent and competitive, when the ONGC/GSPC gas is ready to flow, they too will call in a handful of companies, preferably those desperate for gas, and claim this is the market price! That is, if a bid is not conducted correctly, it can lead to absurd prices.

Under the circumstances, the best solution is for the government to ask the courts to settle the RIL-NTPC case early, as it has done in countless other cases of importance (such as the recent airport privatisation). If NTPC wins, the gas price gets fixed at one level. If Reliance wins and the NTPC bid is invalidated, all that needs to be done is to ensure there is a rigorous open competitive bid the next time around to fix the price of gas. Anything more than this is just gas.

sunil.jain@bsmail.in