A lot of gas

The pricing of gas has become one of the most important economic questions before the government, since it has implications for future energy scenarios. Gas, after all, is the fastest growing source of energy, and the preferred form of fuel for many industries, including power and fertiliser. It could also become the fuel of choice in kitchens, and for transport. This explains the fuss over Reliance Industries' proposal to price its gas at more than $4.50 per million British thermal units (Btu).

In a market context, the fuss is illogical and has no justification. Reliance has bid competitively for its gas fields, and it has to sell the gas that it has found and is preparing to produce, in an open market. Its proposed price may be high by historical standards, but it is lower than what Iran intends to charge for what Indian hopes to transport by pipeline through Pakistan, and it is cheaper than the gas that comes by ship to specially built terminals on the west coast. It is also quoting less than the spot price of international gas, and less than the equivalent price of crude oil. What is more, Reliance has found customers who are willing to pay the asking price because the alternatives (fuel oil and naphtha) are more expensive.

Why then are people complaining? First, because two specific customers (the Anil Ambani group and the state-owned National Thermal Power Corporation) have alleged violation of supply contracts at much lower prices and have dragged Reliance to court. The Bombay High Court last week ruled against Reliance, but the matter will probably go to a higher court in appeal. And second, because two primary user industries (power and fertiliser) suffer from extensive government controls and regulation, including on their selling prices, so they feel vulnerable when it will cost close to Rs 7 per unit to generate power. The first issue is being resolved in the courts. The answer to the second issue is that it is time the government stopped putting so many controls on industries; both fertiliser and power should be de-regulated and gas pricing left to the market as it has indeed been so far as all other suppliers are concerned. Any explicit subsidies (to small farmers, for instance, to lower their cost of agricultural inputs) should have a clear logic and get paid out of government budgets in a transparent manner.

There is a third issue, concerning the capital expenditure that Reliance has in mind. The company proposed initially to invest $2.5 billion to develop two of its gas fields; this investment figure was then more than doubled, but so was the proposed output. Late last year, however, the company increased the proposed capital outlay by a further 50 per cent, with no increase in output, and the government seems to have approved this without batting an eyelid. The implications for the government itself are serious, because the share of the gas that it gets from Reliance varies with the return on the investment made by the company. The latest increase in investment outlay means, by one estimate, that the government will lose out on the value of gas to the extent of Rs 33,000 crore""which is more than the annual collection from the service tax! Reliance may well have good reasons for deciding to increase the proposed investment, but the lack of transparency in a vital energy field stands in sharp contrast to the transparency with which power pricing (for instance) is decided by independent regulators. The sums involved are large, and deserve proper scrutiny and explanation, so that no one shouts "Scam!".