Too little, very late

BS OPINION

Today, while private sector and joint sector developers such as Cairn Energy charge the international price of around Rs 7,500 per thousand cubic meters, ONGC can charge just Rs 2,850.

In its generosity, the Group of Ministers has recommended that this be hiked to a princely Rs 3,200, and this proposal will now go to the Union Cabinet.

The reason why the Group could not have allowed ONGC to charge the free market price is simple "" subsidised ONGC gas goes to feed subsidised urea production, and it goes to feed electricity units that sell subsidised or stolen power.

Imagine the impact of more than doubling gas prices. Immediately, the costs of gas-based power will go up by around 50 per cent. And since politicians don't allow state electricity boards to recover costs from consumers (none of them poor, as the last census has shown, since the poor don't have electricity connections), SEB losses will go up dramatically.

The impact on the fertiliser sector will be equally dramatic. Even at a conservative estimate, around a third of the government's Rs 12,000 crore fertiliser subsidy goes to fertiliser units that are unable to produce at import-competitive costs.

So, if the price of gas is hiked to free-market levels, two things will happen. Either fertiliser subsidies will have to be hiked, or several fertiliser plants will have to be closed down.

Both are options the politicians don't want to exercise. Never mind that, in September 1997 itself, the government issued a circular laying down the road map for freeing prices "" by 2001-02, ONGC was supposed to get market prices, based on a basket of fuel oils.

Not allowing ONGC to raise its prices to free market levels, needless to say, dramatically depresses profits "" if ONGC charges these prices, at current production levels, its profits will go up by more than Rs 8,000 crore, a rise of close to 80 per cent of current profit levels. The issue, however, is not just that of profitability. It is that of resources.

Today, ONGC has to invest over Rs 50,000 crore of capital in the 10th Plan period to maintain, and increase, its present level of discoveries of new oil reserves.

Its reserve accretion ratio "" the ratio of increased reserve discoveries to total production "" had fallen below unity for years, and has only now gone back over unity.

Without enough capital, ONGC's ability to find new oilfields is certain to be hit. From the political point of view, though, that may not matter too much. Because energy security is not an election issue.