The government has used fallacious arguments to double the price of gas and hand over windfall profits to India’s richest company
Hans Christian Andersen’s story about the emperor’s new clothes came to
mind as I read the Finance Minister’s justification of the totally
indefensible hike in India’s wellhead price for dry natural gas. The
absence of any evidence-based research backing key economic decisions is
the true “economic reality” of India, which is today the only country
in the world that sees no difference between the wellhead price of
natural gas and the price of liquefied natural gas (LNG).
The core argument being presented is that the higher price will yield
higher upstream investment in untapped hydrocarbon frontiers, resulting
in higher output of domestic natural gas and the reduction or even
elimination of India’s import dependence on even costlier LNG, thereby
improving the country’s fiscal stability and energy security.
Unfortunately this argument is fallacious on several counts.
Decline in output
First, the government itself admits that despite raising the domestic
wellhead price of natural gas by almost 300 per cent from as low as
$1.79/MMBtu to as high as $5.25/MMBtu, investments in the sector and the
country’s gas output have actually dropped. The bulk of this drop is
because of Reliance Industries Ltd (RIL), the company whose demands
triggered the recent price increase. The Comptroller and Auditor General
report explicitly outlines how RIL reneged on its production
commitments while gold-plating its investments. Can the government
guarantee that a price of $8.4/MMBtu will raise gas availability?
What if history repeats itself and it does not? Will the government then
find more ways to raise prices even further? How long will the
government wait to do so? Does it have a long-term vision based on
geopolitical developments in the energy sector, especially gas, where
Canada and the U.S. are poised to become major LNG exporters?
Significantly, the single largest instance of foreign direct investment
that the above cited 300 per cent price increase attracted was BP’s
acquisition of a 30 per cent stake in RIL’s declining KG basin play and
not in any new greenfield frontier. BP is not known to invest $7
billion-plus for improving a country’s fiscal or energy balance. The
company must have seen returns from a known discovery even at the then
approved price of $4.2/MMBtu.
Second, the import parity price for a globally traded commodity such as
crude oil (unlike natural gas) that has justifiably been in place since
the 1990s has not succeeded in raising domestic crude production
significantly or attracted significant FDI in the Indian sedimentary
basin. Here too, the single largest investment was the purchase of a
foreign company’s stake in an existing on-shore field in Rajasthan.
Finally, and most importantly, even if the government is right; what is
the justification for raising the price of gas from existing fields? We
can always pay a higher price for more difficult horizons provided the
duly approved and audited costs of exploration and production warrant
that. The current production was realised with no prospect of getting
$8.4/MMBtu. Will the government spell out its plan for this windfall
profit it is bequeathing to current producers at the cost of the common
man and honest taxpayers?
It has been argued that the bulk of the benefits from the price hike
will go to the public sector. However, we all know that the upstream
public sector companies are milked by the government through ad hoc
burdens such as funding under-recoveries. Hence, the real beneficiaries
will be private gas producers unless the government also announces
policies that place the same burdens on upstream private and public
sector companies. But that would defeat the real purpose of the price
increase, wouldn’t it? A bogey used to milk the upstream public sector
is the absence of profit-sharing in the nomination blocks that they
received in the pre-NELP era. It would be educational for me and others
if the government would make public the exact amount of profit gas and
profit oil that it has received from private producers since the New
Exploration Licensing Policy was instituted.
In any event, the entire fairy tale of fiscal stability has now been
undermined by none other than the Finance Minister himself. In his press
briefing on Friday, he opened the door for subsidising the purchase of
gas for the power and fertilizer sectors that together use over 75 per
cent of the available gas in India.
Cheating & double-cheating
Like the $4.20/MMBtu price the last time, I am intrigued by the choice
of the number $8.40/MMBtu this time around. In everyday language, these
numbers are used to signify cheating and double-cheating! The price of
4.20 was derived based on a RIL formula that had never been used and is
still not used anywhere in the world to price natural gas at the
wellhead or any other form of gas anywhere. The 8.40 number reportedly
flows from the Rangarajan formula, which again is not used anywhere else
in the world to establish the wellhead price of natural gas or any
other form of gas anywhere.
Can the government identify even a single gas field in the world that
gets a well head price of $8.40/MMBtu for conventional dry natural gas?
How come investments keep taking place elsewhere without resorting to
such dubious pricing formulae? Can Dr. Rangarajan identify which element
in his formula represents the wellhead price for dry natural gas
actually received by conventional natural gas producers around the
world? The truth is that none of the elements in the Rangarajan formula
represents the wellhead price it sets out to establish, and yet it
magically delivers a price at exactly twice the 4.20 level! The Henry
Hub spot price (currently at $3.77/MMBtu), which is the only relevant
element in the Rangarajan formula, is also greater than the wellhead
price received by producers of conventional dry natural gas in the U.S.
‘Gigantic scam’
Strong words are typically not in my vocabulary so let me simply say
that I agree with Gurudas Dasgupta, MP, that a “gigantic scam” is being
perpetrated on the impoverished people of our country.
I also agree with former Union Revenue Secretary E.A.S. Sarma’s
assertion that the gas price hike is a policy initiative that
“socialises costs and privatises profits.” Let us not forget that the
same KG basin gas that was once offered to NTPC at $2.34/MMBtu for 17
years and which is documented to cost under a dollar per MMBtu to
produce received $4.20/MMbtu in the first five years and is now
guaranteed to receive twice that or more in the next five years. This is
the road to wealth in a country wherein some 80 per cent of the people
live below the $2/day purchasing power parity threshold.
I urge the non-Congress leaders to join hands with Mr. Dasgupta in
stopping this loot. Perhaps the Supreme Court, that placed very clear
responsibilities on the government while pronouncing its judgment on the
gas dispute between the then warring Ambani brothers, will take note of
what is going on, especially in light of the CAG’s findings on the KG
basin. Let me add that if indeed India is floating on natural gas,
raising the wellhead price of dry natural gas to levels unheard of
anywhere else in the world is the worst policy option to release this
national wealth. Such an option works best when reserves are limited and
producers gold plate their investment to extract the much needed energy
at higher and higher prices to achieve the investment multiples that
current policies guarantee — just as the CAG discovered in the case of
KG basin.
In closing, let me inform the honourable Petroleum Minster that everyone
related to the hydrocarbon field in India knows that I do not represent
any lobby — not even the oil and gas import lobby that our Petroleum
Minister seems to have inside information on. My old and new clothes do
not come from any vested interest, blandishment or deception. Can our
emperors make the same claim?
(The writer, formerly Principal Adviser, Power & Energy,
Government of India, is Adjunct Professor, Lee Kuan Yew School of Public
Policy, National University of Singapore)
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