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| Not just gas prices | | Besides natural gas prices, a policy review should also cover power and fertiliser |
| Business Standard / New Delhi Jun 01, 2009, 00:45 IST |
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A policy review should also cover power and fertiliser
If the government does double the price of natural gas for state-owned companies like ONGC, as Petroleum Minister Murli Deora has said, it won’t be a day too soon. While the government has been thinking of deregulating natural gas prices altogether, the dual pricing strategy being followed was always a mystery — while ONGC could not sell gas above an administered level, newer private sector rivals (including joint ventures of ONGC, ironically) could sell their gas at a market-determined price. If the price is now raised to $4.20 per mmbtu, from the current price of under $2 per mmbtu, around Rs 8,000 crore or more will accrue to ONGC. Net of government levies and taxes, ONGC could get around half this sum. And since this is money goes straight to the company’s bottom line (which showed a Rs 16,000 crore profit in 2007-08 and may be around the same number in 2008-09), ONGC will see a sudden surge in its value. With a stock price-to-earnings ratio of around 11, this could mean an increase in ONGC’s market capi alisation by around Rs 45,000 crore.
Before the government goes ahead with its plans, there are other pricing issues that need to be sorted out — because there is price control on not just natural gas but also on its downstream users, which are the producers of fertiliser and power. In the case of the power sector, for instance, the retail price of power produced from gas will rise by around a rupee per unit. Since power produced from gas accounts for 10-15 per cent of the country’s total power generation, the average cost of power will rise by 10 to 15 paise—which is something that can be passed on to consumers.
However, there is a case for freeing gas pricing. The price of $4.20 per mmbtu was discovered when Reliance Industries called for a limited bid for its KG Basin gas. What the government needs to do is undertake more thorough price discovery. This would mean ONGC has to offer all the gas it has for the auction, and all potential buyers should be invited to bid. But no power plant can bid unless it knows that the state electricity regulators who determine power pricing will allow full recovery of fuel costs, through increased tariffs. In other words, no decision on freeing natural gas prices can be made without looking at what happens to electricity and fertiliser subsidies. Deregulation cannot be taken to mean that one set of administered prices gets replaced by another set of administered prices; there has to be a broader pricing policy review that deals with the interests of all stakeholders.
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