Move forward on gas

Modify Rangarajan price, and be firm with licensees

A new price for domestically produced natural gas was supposed to be notified by July 1. However, the Cabinet Committee on Economic Affairs (CCEA) on Wednesday chose to defer a decision on the gas price for three months. Petroleum and Natural Gas Minister Dharmendra Pradhan said that this was in order to hold comprehensive discussions and consult stakeholders. What is worrisome about the delay is that this decision has already been pending for months. The three-month extension the CCEA has decided upon must be the last such exercise.

Overall, this has become such a controversial issue that it is necessary that an equitable and just way forward is found, one that neither penalises the taxpayer nor disincentivises future exploration for natural gas. In particular, the chosen formula for gas prices must be revisited. The suggestions of the Rangarajan panel simply make no economic sense. One point stands out: that a crucial bit of data that went into calculating a well-head natural gas price in India under the Rangarajan formula was the spot price of liquefied natural gas (LNG) in Japan, less the cost of liquefaction and transport. It is noteworthy that the gas price in energy-hungry Japan is among the highest in the world, and that it is a product of complicated oil-indexed contracts that are on their way out. Clearly, any acceptable formula should exclude or replace the Japan LNG price.

In the noisy discussion over the gas pricing problem, an argument is often made that a reasonably high price for natural gas, such as the one that obtains under the Rangarajan formula, is still worth paying - since the alternative is the high price of imported LNG, sometimes $17-18 per million British thermal units (mBtu). Paying $8-9 per mBtu for domestic gas, then, looks like a steal. However, this is a false comparison. As the Rangarajan Committee itself recognised when calculating "netback" prices, the cost of liquefying and transporting gas is particularly high. The incentives for producers to maximise production depend on well-head prices, and there is no reason to pay a higher well-head price here than what prevails in most parts of the world - as is being demanded by the concessionaires.

The government must also be firm with the licensees of the domestic gas fields. Demands that a higher price be paid for gas committed out of past production cannot stand. For that gas, exploration and development costs have already been incurred long ago, when the old gas price ruled. There should also be no incentive built up for companies to hoard gas in expectation of future price rises - irrespective of whether or not this has happened already. The new price must be for new finds and development of new fields, since the rationale for cost increases is that costs have gone up and producers need a better price incentive that matches the higher global prices prevailing today. The government must not delay further. Indeed, even before the three months are up, it must start increasing downstream prices of gas users' output - whether of power or of fertilisers - so that a higher gas price does not become an immediate addition to an already bloated subsidy bill.