News Release Details
Gas pricing confusion
New Delhi 05-Sep-2007
The spate of domestic gas discoveries over the last few years is all set to reverse the prevailing shortages. Indeed, India may just become self-reliant in gas, but may a book becoming a net exporter if the finds live up to expectations. However, before that happens, several issues related to domestic discoveries need to resolve over pricing, allocation and use. These issues are being addressed at the highest level of government following a hue and cry by user ministries, including power and fertiliser. In light of large gas discoveries being announced on the domestic front, availability is suddenly going to go up substantially. Notwithstanding the prevailing gas shortages, we certainly see the situation getting better in the next five to six years. Out of the 162 exploration blocks awarded so far under various rounds of Nelp, there are fourdiatare likely to start production in the next five to six years. Going by the production plans of the discoveries announced by companies like Reliance Industries Ltd (RIL), ONGC and GSPC in the Krishna-Godavari (K-G) and Mahanadi basins, an additional 200 million standard cubic meters per day {mmscmd) of gas will flow in the next five years, taking the availability up three-and-a-half times from the current level of 18 mmscmd. And this does not include the Cauvery basin announcement of RIL or the K-G announcement by ONGC a fortnight ago. So, directionally, what I am trying to say is that, there is going to be sufficient gas available in the country in coming years. Recently, there was a directive from the Prime Minister's Office clearly stating that the power sector should concentrate more on creating coal -based capacities. If you really want to meet the power capacity addition targets for the 11th Plan, you cannot dot ton coal alone. Without gas-based power plants, we will once again fail to achieve the targets. More so, when gas will be available and we move away from a shortage scenario. Should the power sector depend upon gas or should the entire gas be given to the fertiliser sector leaving the power sector to survive only on coal is a very important question. Under the National Electricity Policy, issued for the first time by the government, there are two important targets to be met by 2012. They are: "power for all by 2012' and doubling power capacity from 60,000 mw to 1, 20.000 mw in the next five years. So, we have to implement around 15,000-16000 mw capacities every year to achieve this target. And to achieve this, we have no choice but to ensure that we tap every possible source. With the availability of gas in the country going up substantially, what becomes clear is that gas is going to play a crucial role in the energy sector in years to come. This leads us to issues relating to its use and pricing. Earlier, we had small quantities available domestically, but now with so many new discoveries being announced on the home front, these issues become much more relevant than before. The demand for gas in the power sector is a function of price; if the price is high, there is no demand for gas. That is where the pricing issue becomes a crucial one. Also, you cannot talk about gas pricing in isolation but in the context of the entire energy value-chain, which is gas to power generation, power to distribution and distribution to retail tariffs. In our country, retail tariffs are regulated in the power and fertiliser sectors. So, when you have a major share of the energy chain regulated, you cannot talk of a situation where the end product is regulated even as the input {here, gas) is not regulated but market-driven. This will lead to more distortion. Another crucial issue relates to the so-called 'market determined price'. The market, by definition, means that supply is more than demand, or else it is an auction. So, have we reached a stage where supply is more than demand? Do we have multiple suppliers competing for the product or not, and do we have benchmark tariffs to d ay? There is also a clear supply-demand mismatch. In the prevailing situation of power shortages, if the distribution company starts selling power freely, the way they want, the tariffs will sky rocket. So as long as the shortages exist, we cannot resort to this kind of a n arrangement. Second is on having multiple suppliers, which we don't have. Then comes the market price issue. Today, 70% of the gas coming to the power sector is at an administered price. But everyone keeps talking only about the remaining 30%, which is JV gas or imported LNG. But if one analyzes the consumer price, most contracts are for less than 1 mmscmd of gas. And most of the contracts are for one to three years. It is unfortunate that one of India’s most successful initiatives, namely the energy sector’s new exploration and licensing policy (Nelp), which has boosted the country’s gas reserves beyond anyone’s dreams, is under threat from a righteous rigmarole over gas pricing. This comes on top of other equally relevant issues like the sharing of pipeline networks. Ironically, at the core of the pricing problem is the sharp increase in international gas prices. While this accelerated the efforts of private explorers, it also emboldened state interventionists to revive old notions of what constitutes a “fair” price for something some people still assume to be a “public resource”. The long history of state-fixed pricing complicates the story. Domestic gas produced by India’s public sector companies was priced at Rs 2,850 per standard cubic meter (SCM) under the administered pricing mechanism at the start of the decade. This was revised last year to Rs 3,200 for power and fertiliser firms. However, the government also made it clear that prices for users other than power and fertiliser plants would be steadily raised to reflect market levels over a period of five years. But even these “market prices” were subject to a ceiling of $3.86 per mmbtu, or Rs 4,655 per SCM for 2006-07, the landed price of re-gasified ex-Dahej LNG. The prices of gas supplied by private sector operators under Nelp were to be decided on the basis of production sharing contracts that made the government party to the process. The current focus of dispute is Reliance’s reported asking price of $4.33 per mmbtu (which overshoots the ceiling) for its K-G basin gas. To the extent that this is much below the $8-9 per mmbtu going price for spot imports, this is a generous offer. Sections of the government, however, do not see it that way. They want lower prices. But their argument is weak. For one, contractually, the higher the prices go, the larger the government’s share of revenues from the output. For another, straying too far from market prices only gives user industries a false impression of their cost competitiveness, and this hurts the efficiency of the economy in the long run. One have to distinguish between a consumer, who is buying small quantities for a shorter period with one that is ready to buy huge quantities for a longer period. We do not presently have long-term contracts in the country. We do not have a benchmark price for gas in our country but eventually; India will need a domestic market mechanism for the spot discovery of gas prices, a la America’s Henry Hub
New Delhi 05-Sep-2007
The spate of domestic gas discoveries over the last few years is all set to reverse the prevailing shortages. Indeed, India may just become self-reliant in gas, but may a book becoming a net exporter if the finds live up to expectations. However, before that happens, several issues related to domestic discoveries need to resolve over pricing, allocation and use. These issues are being addressed at the highest level of government following a hue and cry by user ministries, including power and fertiliser. In light of large gas discoveries being announced on the domestic front, availability is suddenly going to go up substantially. Notwithstanding the prevailing gas shortages, we certainly see the situation getting better in the next five to six years. Out of the 162 exploration blocks awarded so far under various rounds of Nelp, there are fourdiatare likely to start production in the next five to six years. Going by the production plans of the discoveries announced by companies like Reliance Industries Ltd (RIL), ONGC and GSPC in the Krishna-Godavari (K-G) and Mahanadi basins, an additional 200 million standard cubic meters per day {mmscmd) of gas will flow in the next five years, taking the availability up three-and-a-half times from the current level of 18 mmscmd. And this does not include the Cauvery basin announcement of RIL or the K-G announcement by ONGC a fortnight ago. So, directionally, what I am trying to say is that, there is going to be sufficient gas available in the country in coming years. Recently, there was a directive from the Prime Minister's Office clearly stating that the power sector should concentrate more on creating coal -based capacities. If you really want to meet the power capacity addition targets for the 11th Plan, you cannot dot ton coal alone. Without gas-based power plants, we will once again fail to achieve the targets. More so, when gas will be available and we move away from a shortage scenario. Should the power sector depend upon gas or should the entire gas be given to the fertiliser sector leaving the power sector to survive only on coal is a very important question. Under the National Electricity Policy, issued for the first time by the government, there are two important targets to be met by 2012. They are: "power for all by 2012' and doubling power capacity from 60,000 mw to 1, 20.000 mw in the next five years. So, we have to implement around 15,000-16000 mw capacities every year to achieve this target. And to achieve this, we have no choice but to ensure that we tap every possible source. With the availability of gas in the country going up substantially, what becomes clear is that gas is going to play a crucial role in the energy sector in years to come. This leads us to issues relating to its use and pricing. Earlier, we had small quantities available domestically, but now with so many new discoveries being announced on the home front, these issues become much more relevant than before. The demand for gas in the power sector is a function of price; if the price is high, there is no demand for gas. That is where the pricing issue becomes a crucial one. Also, you cannot talk about gas pricing in isolation but in the context of the entire energy value-chain, which is gas to power generation, power to distribution and distribution to retail tariffs. In our country, retail tariffs are regulated in the power and fertiliser sectors. So, when you have a major share of the energy chain regulated, you cannot talk of a situation where the end product is regulated even as the input {here, gas) is not regulated but market-driven. This will lead to more distortion. Another crucial issue relates to the so-called 'market determined price'. The market, by definition, means that supply is more than demand, or else it is an auction. So, have we reached a stage where supply is more than demand? Do we have multiple suppliers competing for the product or not, and do we have benchmark tariffs to d ay? There is also a clear supply-demand mismatch. In the prevailing situation of power shortages, if the distribution company starts selling power freely, the way they want, the tariffs will sky rocket. So as long as the shortages exist, we cannot resort to this kind of a n arrangement. Second is on having multiple suppliers, which we don't have. Then comes the market price issue. Today, 70% of the gas coming to the power sector is at an administered price. But everyone keeps talking only about the remaining 30%, which is JV gas or imported LNG. But if one analyzes the consumer price, most contracts are for less than 1 mmscmd of gas. And most of the contracts are for one to three years. It is unfortunate that one of India’s most successful initiatives, namely the energy sector’s new exploration and licensing policy (Nelp), which has boosted the country’s gas reserves beyond anyone’s dreams, is under threat from a righteous rigmarole over gas pricing. This comes on top of other equally relevant issues like the sharing of pipeline networks. Ironically, at the core of the pricing problem is the sharp increase in international gas prices. While this accelerated the efforts of private explorers, it also emboldened state interventionists to revive old notions of what constitutes a “fair” price for something some people still assume to be a “public resource”. The long history of state-fixed pricing complicates the story. Domestic gas produced by India’s public sector companies was priced at Rs 2,850 per standard cubic meter (SCM) under the administered pricing mechanism at the start of the decade. This was revised last year to Rs 3,200 for power and fertiliser firms. However, the government also made it clear that prices for users other than power and fertiliser plants would be steadily raised to reflect market levels over a period of five years. But even these “market prices” were subject to a ceiling of $3.86 per mmbtu, or Rs 4,655 per SCM for 2006-07, the landed price of re-gasified ex-Dahej LNG. The prices of gas supplied by private sector operators under Nelp were to be decided on the basis of production sharing contracts that made the government party to the process. The current focus of dispute is Reliance’s reported asking price of $4.33 per mmbtu (which overshoots the ceiling) for its K-G basin gas. To the extent that this is much below the $8-9 per mmbtu going price for spot imports, this is a generous offer. Sections of the government, however, do not see it that way. They want lower prices. But their argument is weak. For one, contractually, the higher the prices go, the larger the government’s share of revenues from the output. For another, straying too far from market prices only gives user industries a false impression of their cost competitiveness, and this hurts the efficiency of the economy in the long run. One have to distinguish between a consumer, who is buying small quantities for a shorter period with one that is ready to buy huge quantities for a longer period. We do not presently have long-term contracts in the country. We do not have a benchmark price for gas in our country but eventually; India will need a domestic market mechanism for the spot discovery of gas prices, a la America’s Henry Hub