Visakhapatnam
July 14, 2007
E. A. S. Sarma
14-40-4/1 Gokhale Road
Maharanipeta
Visakhapatnam 530002
Tel. No.: 0891-6619858
Mobile No.: 9866021646
Email: eassarma@gmail.com
To
Dr. Manmohan Singh
Prime Minister
Dear Dr.Manmohan Singh,
The Chief Minister of Andhra Pradesh has rightly expressed his anguish at the way the Reliance Group of companies has been trying to dictate terms to the State Government in the matter of pricing natural gas from their offshore gas fields in Krishna Godavari basin.
The gas that is found onshore or offshore, whether it is by ONGC, Reliance or any other private company, is a natural resource that belongs to the people of this country. It is held in trust by the government on behalf of the people. The government is therefore not competent to dole out this precious resource to a private agency for making undue profit, under the guise of a production-sharing contract or any other means. The argument put forward by the Ministry of Petroleum recently that the Ministry has no role to play in the matter of pricing gas merely exposes the irresponsible manner in which the government has so far dealt with the induction of private players in the development of hydrocarbon resources of the country.
Anticipating the unethical moves of the private players, I had earlier written at least three letters, one to the then Petroleum Secretary on October 10, 2004, a second one to the Chief Minister of AP on May 4, 2006 and another letter to the Cabinet Secretary on December 19, 2006, cautioning them about the possible danger of Reliance and other companies exercising monopolistic power to fleece both the unsuspecting consumers and the respective State Governments. Despite these early warnings, the government has chosen to be a silent and passive spectator, allowing Reliance to have a free hand in pricing gas in whatever manner they wish to.
The world natural gas market is a highly fragmented one. Unlike in the case of crude oil and petroleum products, there is nothing that could be called the “market price” of gas at any given point of time. It is strange that Reliance should be allowed to devise its own method of “discovering” by calling for tenders in a highly restricted sellers’ market and directing the State Government to pay them on par with the highest bid price for the gas to be used in power generation and in transport and domestic sectors. These very same bidders for the gas are those that have entered into highly asymmetric Power Purchase Agreements with the State electricity utility and they would in turn merely pass on the full cost of gas purchases to the State utility. In other words, the State Government would face the double jeopardy of bearing the high cost of electricity generation from private IPPs who have deliberately bid a high price for Reliance gas and also paying on par with that high gas price for utilizing the gas for supplies to domestic and other users. In fact, the State Government finds itself in such an awkward situation entirely as a result of the indifference, insensitivity and incompetence displayed by the Central Government in dealing, first with the design of the production sharing contracts and, second with the drafting of the latest Petroleum & Natural Gas Regulatory Board Act of 2006!
I am not sure whether there is a grand design behind all this!
The Preamble of the above cited Act clearly refers to the need to “protect the interests of the consumers”. Section 11(a) of the Act reiterates this laudable concern. But, the Act itself is blissfully silent on the instrumentalities through which this concern would get addressed.
All the three consuming sectors, namely, power, transport and domestic sectors are such that it would be difficult for them to bear any undue cost burden, especially a cost burden arising from the rent-seeking opportunity handed over by the Central Government to private players. To permit the private gas producers in this country to charge a high rent on a natural resource defies all cannons of good economics. The Centre has done precious little to promote competition in the domestic gas market.
I would request the government to wake up to this reality at least now, amend the production contracts in public interest and ensure that the consuming sectors are not forced to pay anything more than the actual cost of development and an economically justifiable margin of profit, on the lines permitted by the regulators of electricity. The newly created Petroleum Regulator should be empowered to deal with the pricing of crude oil and natural gas in all its dimensions. There is also need to harmonise the petroleum and electricity regulation laws to bring sanity in the matter of pricing hydrocarbon fuels in tune with electricity price regulation.
I may mention here that the government’s response to this will be closely watched by the people at large. We had the unfortunate saga of Dhabol in Maharashtra. We do not want more Dhabols in the name of gas privatization!
Regards,
Yours sincerely,
(E. A. S. Sarma)
