Our steps may save $40 bn from yearly oil import: Kelkar panel

'Possible by implementing market-linked pricing of natural gas after the end of the Plan period'

The panel on the petroleum sector reforms says its recommendations could save up to $40 billion of India’s $155-billion annual crude oil import bill in the medium term.

The panel is chaired by Vijay Kelkar, former finance secretary.

This is possible by implementing market-linked pricing of natural gas after the end of the current Plan period, March 2017. “The committee has identified various policy actions that can be implemented immediately," it has said in a consultation paper to the petroleum ministry, ahead of its final report on curbing import dependence.

"The fair price for gas can only be the best price a gas molecule commands or the price that is market-determined in a transparent way, on an arm's length basis. As the present generation is borrowing this finite resource from grandchildren, equity requires the generation be fairly compensated," Kelkar told Business Standard.

He said the panel’s recommendations on gas pricing were limited to producer prices and did not apply to consumer ones.

According to Kelkar, a competitive market-linked price for natural gas will incentivise higher exploration and production and make marginal and stranded fields viable. Discoveries are likely to be in deep water and ultra deep water basins, implying riskier exploration expenditures. "As gas prices rise to market levels, increased production will lead to direct savings in the import bill, current account deficit and improvement of the economy's fiscal health," the committee said.

Also, higher gas production and prices would increase government revenues in the form of royalties, dividends and corporate income tax, all of which can be ploughed back in the economy. Market-linked pricing will also incentivise investment in new technologies for exploiting shale gas and coal-bed methane reserves.

"Market-determined pricing would also promote transparency and prevent rent-seeking behavior, which is promoted by the current quantity-based allocations of gas," Kelkar has said. He defined "rent-seeking" as lobbying with the government for subsidies, grants and rate protection.

The panel has also recommended changing the gas supply agreement templates, in the interim period of a switch to market prices, to bring these on a par with global best practices. For this, the Petroleum and Natural Gas Regulatory Board must develop transparent procedures to verify gas contracts and ensure transactions are done on an 'arm's length basis', it said.