FEATURE: Gas price hike is not about investment, but selective profits

If companies are lining up to invest in the gas sector in the US where natural gas trades at $3-4 per mmBtu, there is little reason to increase prices in India

Analysts have hailed the gas price hike as a reformist measure which would bring in more investments in the country. That is natural as higher profitability would attract capital.

The rationale for setting up a committee to decide the price at which natural gas can be sold in the country was simply that it should be attractive enough to bring in investors. Little thought was given from the consumer’s point of view. There wasn’t much thought given even in terms of what the government would earn by this hike. The focus was very clear, that the price should be attractive for investments in the sector.

The Cabinet Committee of Economic Affairs (CCEA) cleared the gas price hike from $4.2 mmBtu to $8.4 mmBtu with the noble intention of attracting much needed investments.

However, consider this fact. Gas price in the US are market-determined and trade between $3-4 across various states. Yet, at these prices, there are companies lining up to invest in the US to explore gas. They do not need artificially higher prices to attract investment, but somehow our authorities believe we should offer more.

The logic being that higher prices would mean higher investments as exploration and production is a risky business. Just like pharmaceutical companies justify high prices of drugs because they need the extra profit to meet the cost of research, oil companies demand higher prices because they do not strike oil in every well they drill. Fair enough, but if these conditions are not applicable in the US, why give special treatment in India?

When Indian companies acquire assets across the world, they do so knowing very well that they will be getting international prices of the commodity, not at a special or landed price parity.

The only beneficiary of higher gas prices are private sector players. The public sector companies, as per an ONGC official have to pay back the incremental profit by way of dividend or will be adjusted against the subsidy element, and there will be no incremental cash benefit for them.

As for private sector players, the government allows cost recovery of wells dug up. The government’s profit is triggered only after all production and exploration costs are recovered. So where is the risk element that these companies are being compensated for their investment?

The government is talking of increasing investments in the sector, yet its own companies are competing against each other to acquire assets abroad. Despite the high level of dividend payouts and subsidy non-payment, public sector oil and gas production companies are making very good profits. However, they still prefer to look for assets abroad, rather than invest in India for gas production, despite price parity at $4.2 per mmBtu.

The fact that public sector companies prefer investing abroad rather than in India indicates that either there are no opportunities in India for gas production or they are being discouraged to invest in the country. As events unfold over the next few years, the true beneficiaries of the gas price hike will be revealed.