A gas giveaway?

The myth of a 'market-linked' price for gas

In 2013, the government set up a committee headed by the former finance secretary, Vijay Kelkar, to examine gas pricing and exploration. The committee has now submitted a consultation paper to the petroleum ministry, in which it recommends gas be "priced at the highest price possible in the market, based on market-determined pricing". The stated purpose of this is to ensure "energy security ... by encouraging domestic exploration and production, efficient use of the resource and reduction in the import burden". Certainly, nobody can argue with the fact that higher prices could reduce the import burden and discourage inefficient use. But the recommendation nevertheless falters on the idea of "market-determined pricing". How is that even possible, when there is no market for natural gas? It is a meaningless phrase in the context of the current state of the gas market and, therefore, an irrelevant concept.

It is not the case, either, that there is no market for natural gas because of the peculiarities of India's pricing of petroleum products. No - as it happens, there is no proper market for natural gas. The amount of gas that costs $3 a unit in the United States can cost $15 in Japan. The reason is that natural gas can cost a great deal to transport across great distance - unless there is a pipeline, in which case transport costs fall sharply. Thus, there is no worldwide market, and the possibility of one emerging in the near future is extremely remote.

Other questions also arise. For one, what is special about natural gas? If natural gas is to be priced "as high as possible", why not coal? Why is that available at sharp discounts from the international price? Consider this comparison: at most, much of Coal India (CIL)'s product is priced at around $50 a tonne, including transport costs, judging by CIL's average realisations; but coal from Indonesia, the cheapest import, costs about $60 a tonne after transport, and Australian coal costs $72 - before transport. Similar arguments can be made for oil, and for other forms of energy. Gas should not receive special treatment - that would be dangerously distortionary.

In any case, the Kelkar committee has claimed that a higher price is necessary to encourage domestic exploration and production. There is no need, therefore, for a higher price on existing wells or gas fields. The committee's logic should not be applicable to them, particularly since those fields have already become productive at old capital costs that have been claimed as the cost of development. "Market-linked" price increases, even under the committee's flawed logic, should only apply to as-yet-undiscovered wells and fields.