The US is abuzz with additional crude oil production shaking Opec relevance in the global market. In an interview with Jyoti Mukul, Fereidun Fesharaki, chairman, FACTS Global Energy, a leading consultancy in the energy space, says oil prices will come down but for India domestic natural gas pricing will be a challenge. Edited Excerpts:
How to do you read the changes brought about in energy pricing in India over the last two-three years?
The Indian government has been subsiding a lot and what it is now doing is reducing subsidy but the good news is oil price will go down by 20-25 per cent in the next two three years--everything from price of oil to petroleum products and natural gas indexed to oil will come down. The biggest challenge for India, however, is pricing of gas. There are two three important buyers of gas. Power sector says we want cheap gas like what is in the US but for that you have to move to US. This part of the world is pretty different. Petronet will be paying $12-13 per million British thermal unit next year. It is pointless to say that I will look for cheap gas.
The challenge for India is to fight internal rivalries. Priority has to be given to Indian companies to produce domestically. Like you pay international gold price in the market so you need to respect the global price.
But increasing price when the US prices are coming down invites criticism?
Domestic gas price in India has increased several times. Latest one is the complicated formula of Rangarajan committee but nobody in the world fully understands what it means. In the existing formula, European and American price are averaged with Petronet price. It is takes into account the US price but what is the US price got to do with India. It is like saying I want to buy a car here at the average price in the US. Don’t keep comparing with the American they have a local market and if you want to bring that gas it will cost at least $12. The government has come half way at $6.40. From January 2014, Petronet has to pay $12-13 for gas to Qatari, so the average price may go up to $8 in future. Oil prices are global and gas price is regional. American price will always be lower than the European and the European will always will be cheaper than the Asian. We cannot create convergence of these markets. The best thing that the government can do is to move towards international price for oil and gas.
There is a view that the domestic gas price should be correlated to cost of production.
Cost of production is $1 in Saudi Arabia then why are they asking for $100? In international market, this question is nonsensical. Price of gas or oil or aluminium or gold, is not a cost plus anywhere in the world. In Qatar, it costs $2 but you pay $12. The question is why is GSPC asking for $14-16 price because that this is what they estimate will be the cost of gas from KG basin. The question is what is the price needed to get new gas into production. It is the new gas which we should be worried about.
The opposition to price increase comes because Reliance Industries Ltd is perceived to be making windfall gains.
If the price of gas goes up, ONGC will benefit the most because they have the major share of the market. RIL has only 10-15 per cent of the market. And, if I pay the world market price somebody will benefit whether it is Qatari or ONGC. It doesn’t matter. In China, they raised prices same time as in India. The state-owned company makes money there and then they go and make purchases and ONGC-OVL lose. Somebody in the country should make money rather than money going to Qatari, Nigeria or Australia.
How do you see the global crude oil and gas prices moving?
If crude prices goes to $80, gas will be $1-2 cheaper. Gas price indexed to oil will come down. Gas is the little brother. Most the world, gas price is oil indexed. If the price of oil goes down, LNG price will go down. In India, domestic price will not go higher than the imported gas. Petronet price can be the marker.
How will the non-Opec players determine the market?
There is too much oil in the market. The US is increasing oil production twice the size of Iraq which is adding 300,000 barrels a day. Three places supply is going up in the US, Canada and Iraq. US and Canada are outside Opec and Iraq is in Opec but they do not respect Opec rules so effectively they are outside Opec. They produce more oil, so Opec produces less oil. So far, Saudis managed this game but two three years down the line, prices will go down.
How has shale gas changed the American market and what kind of prospects does India have in shale?
Gas price in the US are lower than the cost of production. The reason they survive is because the liquids shale oil pays for it, essentially subsidize. Shale story is long-term story. Shale prospects in India are very limited. Costs are high and Indian shale is dry and there is no pipeline infrastructure here. We do not count on shale from India. It has either to produce conventional gas or import. We are very pessimistic. The Government talks about it because it is required to do so.
How real are the environmental concerns?
In the US, environmentalist complain and companies respond to it. If in America, the environment issue is not there, it won’t be even here. It is the cost which is important. In India, it will be in farms where people are living. Shale gas result in tremors and disrupts farm life. Shale gas story in India is not a relevant story. India will have to go and buy coal and gas.
How good has been the structuring of the New Exploration and Licensing Policy?
God did not given oil to India. These exploration rounds bring in some oil and investment but India will have to buy from outside and to the extent domestic production can help, incentive should be given.