With the Group of Ministers (GoM) readying to allocate the unallocated portion of Reliance Industries Limited’s Krishna Godavari Basin gas, the question asks itself: is the country going back to the days of the Administered Price Mechanism, when everything was decided by the government? Many will assume that there is no option since one company (Reliance Industries) accounts for 70 per cent of the country’s gas production and this dominance gives the company market power that it can exploit. Given pricing and marketing freedom, Reliance would sell to the highest bidder, which almost certainly would mean driving up the costs of electricity and fertiliser, which have a large economic impact and which are themselves subject to price controls and subsidies, and, therefore, pay-outs from the exchequer.
Free pricing is easier to argue for when there are multiple suppliers and users; but even in the best circumstances, the gas market is likely to be an oligopoly with obvious potential for cartelisation. So, even if new suppliers like the Gujarat State Petroleum Corporation come on stream, and existing suppliers like Oil and Natural Gas Corporation and Oil India improve their supplying capacity, the market will be skewed against consumers. The check against this is the same as in other traded goods: the threat of imported supplies. The difficulty is that the cost of transporting gas is high enough to give domestic producers a fat margin, which gets cemented into downstream cost structures.
In the case of oil, the government sought to get around an identical problem by devising the oil pool account, which gave domestic producers a lower price and, therefore, cushioned overall costs. However, this was relatively easy because domestic oil production at the time was entirely in the public sector. Matters get more complicated if cross-subsidisation is to cover private sector players. The second problem is that it introduced political decision-making to oil prices, with the inevitable consequences. Also, there are plenty of gas consumers outside of the fertiliser and power sectors, and there is no real case for giving them energy supplies below international prices because that merely transfers surpluses from gas producers to industrial consumers of gas—for which there is no economic logic. It would end up reducing the incentives for getting into gas exploration and production, which is the opposite of what is required. In short, a price control or pooling mechanism is likely to end up being complicated, highly political and counter-productive.
The logic of the situation forces fresh consideration of free pricing as an option, with safeguards. For instance, at least some of the fertiliser and power sectors could be supplied with the government’s share of gas under various Production Sharing Contracts that it has with companies like Reliance. Based on the current profile of costs, it is estimated that after six or seven years, the government could get a 30 per cent share of Reliance gas—which it could use to neutralise the costs of subsidising power and fertiliser. Also, the bidding process should be transparent and unrestricted, unlike the quasi-tender that Reliance used to persuade the GoM to fix its gas price at $4.20 per million British thermal units. Reliance denies that it got firms that were using more expensive fuels to bid a higher price, but the Prime Minister’s Economic Advisory Council examined the bid and said it was opaque; it suggested that new bids be invited “in a transparent and well-publicised manner from all parties so as to discover the true arm’s-length competitive price for gas”. When the GoM meets next to allocate the rest of Reliance’s gas, it would do well to keep these issues in mind.
