Sunita Narain: What price natural gas?

DOWN TO EARTH

On the face, it seems like a fight between brothers. One brother, in this case the elder, Mukesh Ambani, managed to get control over the country's gas reserves. The other brother, Anil Ambani, inherited the gas-based power generation business. Now, the elder brother wants to price gas "at market rates" and has reneged on the price of gas he had settled with his brother. But as there is no competition""natural gas being in the hands of this one big private player ""this means next to nothing.

There is much more to this story than a family soap. Natural gas is crucial to the country's energy security plan. Gas-based power stations are easy to instal, their emissions are low. When gas is compressed, it can drive vehicles""as it does in Delhi. If the use of this fuel is combined with investment in public transport it can reduce air pollution substantially in cities. So the price of this gas must not be a family affair. It is our affair.

Across the world, the price of natural gas is not determined by simple market equations. Partly, the reason is that unlike oil products, there are no costs to manufacture gas. There are no refining costs, only costs to drill and transport. There is, therefore, no 'subsidy' when gas price is cheaper than, say, oil. Instead, countries decide on long-term price agreements for delivery. The other option is to link the price of gas to the basket of crude; so if the average of different oil products goes up, the price of natural gas also increases""a floating price index. The third option is to fix the price of natural gas at the rate of liquefied natural gas (LNG), which is often more widely available, since it can be transported without pipelines. Its costs, which include cooling and re-gassification are higher. In all these scenarios, as the base price of gas is cheaper, the sole supplier of natural gas benefits. Let us be clear, there is no 'market'-determined price to work with.

I know this because I have been watching the developments to bring CNG to cities. In Delhi, the market was mandated by the Supreme Court""through its order that all public transport vehicles should transit to gas. In 2002, the then Union minister of petroleum and natural gas was dead against the introduction of CNG in Delhi. When all ploys to mislead the court failed, he simply raised the price of gas. The court asked us to examine if the price rise was justified. When we looked at the balance sheet of the company, it became clear that because the market was not developed (and never could be), the price, if not regulated through a formula, could lead to windfall profits. We asked that the price should be set so that costs were recovered and profits were secured. But that the profits should not be excessive. As a result, Delhi's gas company, Indraprastha Gas limited (IGL) has been making profits but the prices of gas have not increased substantially.

As CNG was being introduced in other cities, we also wanted a policy directive on its availability and price, which would encourage its use as an environmentally acceptable fuel. This, of course, was never done. A pricing policy was made but never finalised. But by then private players had jumped into the lucrative market and it was in their interest to keep things unregulated. As a result, in city after city""Ahmedabad, Gurgaon, Noida, Lucknow""the programme has faltered because the private company, which by now has arm-twisted state governments to secure rights to distribute gas, has dictated the price.

Similarly, we know that air pollution is choking our cities. But they also need electricity. Gas would be an ideal option for these cities. But if the price of gas is determined based on non-existent market rates, then there is no way it can compete with coal""domestic or even imported coal. In other words, we have, through this market (when markets don't exist) policy of competition (when there is none), created a situation in which our energy and environment security is compromised.