Analysis:Faulty formula will lead to faulty gas price

Rangarajan wants cheap food to be cooked on costly gas

Now that it is known that the opposition is going to take on the government on the gas price hike issue, a blame game has started. Veerappa Moily is left holding the ball when the music has stopped. For nearly a week, various ministers tried to defend this price hike by pointing out how it will attract investments without ever questioning the figure and now that it is becoming too hot to handle, a scapegoat is being dressed up.

Officials say that the $8.4 per mmBtu was nowhere in the picture and the eventual price would be between $7-8 per mmBtu, which would also change every quarter. Even this figure is tentative as the actual price of gas may vary as it is a ‘derived price’ which is arrived at after taking into account a number of other prices.

Moily had indicated that the prices are likely to be in the range of $8.4 per mmBtu, if US’s Henry Hub average, NBP, Japan and LNG import pricing expected in April 2014 were taken into account. The price of $8.4 per mmBtu is clearly based on an assumption of the price that will be prevalent in April 2014. Both Henry Hub (US) and NBP (National Balancing Point (UK)) are exchange traded price and are subject to change every moment. No one can be certain of the price in April 2014; even the $7.5-8 per mmBtu quoted by the officials is subjective. In case of any trouble in the Middle East, prices can zoom higher, and then probably Moily would look like a saint.

But its not just the specific figure that should cause worry, but the assumptions and formula used in arriving at the price. If the formula itself is flawed, the final figure is bound to be wrong. Nowhere in the world is ‘wellhead’ (price of gas at the discovery well) prices determined in the way it has been done by C Rangarajan. Surya Sethi, former Principal Advisor, Power and Energy, Government of India points out India is today the only country in the world that sees no difference between the wellhead price of natural gas and Liquefied natural gas (LNG). It is equating price of milk and cottage cheese.

Of Reliance, by Reliance, for Reliance

Nowhere in the world is wellhead gas price as high as that is India. If the same average of pithead price and landed prices are applied to other mined products like oil, coal, lignite, iron ore among others, their prices would shoot up. The other drawback of the formula is there is no cap or floor price of gas and the price is in dollar terms. In the earlier formula, price was capped at $60 per barrel of crude and a portion of the price was pegged to the dollar at a fixed exchange price of Rs 45 against the dollar. Given the current scenario if oil prices move higher, rupee generally weakens, which would further increase gas price to the consumer.

Fuel supply tends to be a ‘natural monopoly of the supplier’ from the consumer point of view. The agency that supplied cylinder gas or pipe gas in cities is never changed by the consumer. While industries can have provision for alternate fuel, a household consumer pays through his nose when prices are increased. It seems Rangarajan and his committee wants ‘aam aadmi’ to cook cheap food that the food bill will provide on the costly gas that his formula has derived.