Dropping the cost

Let gas prices be benchmarked to coal

The divisions over gas pricing that spilled into the open following the report of a committee led by the chairman of the Prime Minister's Economic Advisory Council, C Rangarajan, continue to bedevil the government. The Rangarajan Committee had proposed a formula that, based in part on various prices for natural gas at its entry points into other Asian countries, would pay $8.8 per million metric British thermal unit (mmBtu) of gas to its producers, particularly the Reliance-British Petroleum consortium that is exploiting the D6 block of the Krishna-Godavari offshore basin. As this newspaper has argued, the committee's report made little economic sense. There is no inherent reason why Indian gas producers should be paid an amount equivalent to the post-delivery cost of gas in other Asian countries. It would, surely, be more logical to create an index of wellhead prices posted by gas suppliers working in equivalent fields - and this has indeed been suggested by the finance ministry. The petroleum ministry, meanwhile, has written a Cabinet note suggesting a completely new and extremely simple price mechanism, which, through a process of simple averaging of imputed payments to producers, suggests that the natural gas price be $6.7 per mmBtu. It is worth noting that even the Rangarajan Committee's price of $8.8 per mmBtu was considered too low by the Reliance-BP consortium, which claims that it would be insufficient reward for the risk that the producers are taking on the high seas.

It bears repeating that gas pricing is highly contingent on variables that are specific to particular markets. Yet there are some broad facts about the Asian gas market that are relevant - for example, that liquid natural gas from the US is considered to become uneconomical in Asia when the price at the US' Henry Hub is over $6 per mmBtu. The Reliance-BP consortium argues that its deposits are undersea and difficult to extract; but Israel has similar fields to exploit, and intends to sell it to Europe with pipeline transport costs of $3 per mmBtu when the European price is $9 per mmBtu or just below. Once again, it does not seem that prices really need to be above $6 per mmBtu.

The truth is that, if KG-D6 gas is priced above $6 per mmBtu, there is little reason to be extracting it anyway from a market economy point of view. After all, India runs on coal at present - and, even when coal is scarce, fields have been shut down by order. Indonesian coal is freely available, with a gross calorific value of 5,300 kilocalories per kilogramme. It is not difficult to show that, if this coal is available at Indian ports at around Rs 3,000 per tonne, then a kilocalorie-for-kilocalorie equivalent price for natural gas should be less than $6 per mmBtu, and indeed closer to $5.5 per mmBtu. So the question becomes: given that India is a coal-dependent country and its coal import needs are rising rapidly, should it not use some form of coal equivalent pricing? The idea deserves to be pursued seriously, if the government truly wishes to simulate the market choice to switch to natural gas through a pricing formula that is more relevant for the Indian situation.