Gas-price policy: Why are power, fertiliser cos against it?

Moneycontrol Bureau

Power and fertilisers, the two key natural gas consuming sectors have vehemently opposed Rangarajan committee’s formula and recommendations on increase in gas prices. While fertlisers sector is supportive of gas price hike up to USD 2- USD 3 per mmbtu (million metric British Thermal units), power sector is willing to pay up to USD 5. The Rangarajan committee’s formula has suggested putting natural gas prices in India at around USD 8 per mmbtu. Natural gas prices in India currently range between USD 4.2 to USD 5.6 per mmbtu, while imported natural gas costs around USD 14- USD 15 per mmbtu. So far fertisers sector have enjoyed the priority status for supply of gas the government is now also considering to give power sector also priority sector status for supply of gas. An empowered group of ministers are likely to soon meet for taking decisions on gas allocation and gas pricing. Latha Venkatesh of CNBC-TV18 discusses the key issues of gas price increase with Satish Chander, DG of Fertiliser Association of India (FAI), Ashok Kumar Khurana, Director General of Association of Power Producers (APP) and RS Sharma, Former Chairman, Oil and Natural Gas Corporation (ONGC). Increase in gas prices will impact subsidy of government who has been struggling to rein in fiscal deficit. “If the gas price increases by (recommendation of) Rangarajan Committee, the prices will almost double. So that will impact the subsidy bill of the government of India,” Chander said. Fertilisers Association had also suggested the government an alternative formula for fixing gas prices, where 50 percent of the gas price can be based upon the cost of production in the country and 50 percent can be through some other index of the imported LNG. According to power sectors increase in gas prices beyond USD 5 would result in high per unit power cost which may not find any takers in the current lean period. Khurana, Director General of APP said that every dollar increase in the gas prices would increase the variable of energy cost of power by another 50 paisa. He believes that pricing formula designed by Rangarajan Committee has taken a very narrow basket and a slightly wider approach would help to arrive at USD 6 per mmbtu gas price. But more importantly he said, “Problem is government wants to increase the prices of the input industry. But on that basis of prices you have the output price increase. There it is completely regulated on that side, so equation never matches.”  The Kelkar Committee is studying the suggestions Rangarajan committee’s recommendation and is likely to come back with a new formula. Must read: Rangarajan's formula too complex for gas consumers: Sharma
_PAGEBREAK_ Below is the verbatim transcript of their discussion on CNBC-TV18 Q: If indeed you have a New Exploration Licensing Policy (NELP) situation of USD 8 and more importantly Administered Price Mechanism (APM) gas is also brought in higher perhaps to USD 6 as the conversation now is, what might be the impact on fertiliser? I am asking because this season even at current levels, there is excess inventory we understand at the distributor level? Chander: As far as the fertiliser sector is concerned, particularly the gas is used by the urea sector as a feedstock and we are governed by the pricing policy of government of India. Today, the urea sector is totally controlled by the government. Our end price is determined by the government, our farmer price is also fixed by the government. So in these circumstances, if the gas price is increased, the burden will come on the government. However, we have also given our concerns, we have also given our views on the issue to the government. We have also suggested some alternative formulation as to how the gas price should be determined. There is no doubt that there will be some increase in the gas price. If the gas price increased, by what the Rangarajan Committee report says then the prices will almost double. That will impact the subsidy bill of the government of India. Q: That it will but as you said your end product prices and therefore the pressure of the increased gas price is not going to be felt on the end product price for fertiliser companies. For the government itself the advantage would be that it is only the fertiliser part that they will have to bear a higher subsidy but they will in fact get higher perhaps royalties, dividends, returns for all the other sectors where they now supply subsidized gas, for instance steel and power as well, from a government point of view, it may not be necessarily all that damaging to increase gas price at the APM level for fertilisers? Chander: To some extent I agree with what you are saying but then the question is how much increase and by what formula. That needs to be decided. Q: What was your recommendation to the government? Chander: We had given two alternatives to the government where we had said that the formulation, where you cannot take the end price from the consumer countries who are totally importing liquefied natural gas (LNG), we had said that 50 percent of the gas price should be based upon the cost of production in the country and 50 percent can be through some other index of the imported LNG. We broadly said that it can be increased by another USD 2-3 but not by the formula what Rangarajan Committee has said. I would like to add that the fertilizer sector was never consulted by Rangarajan Committee. Q: In case we do get an APM price hike or an increase in the gas price which is produced from the NELP blocks then what will be the impact on the power tariffs? If you could quantify the increase and also if power becomes so expensive who do you expect will buy such power? Will it get passed on? Khurana: The answer is very simple. Every dollar increase in the gas prices, increases the variable of energy cost of power by another 50 paisa. So if you increase by Rs 5 you have about Rs 2 increase in the variable cost. Every industry on input side is demanding market driven prices. It is perfectly alright. However, the problem is that government wants to increase the prices of the input industry. On that basis of prices, you have the output price increase and on that side it is completely regulated, so the equation never matches. So, one way is that either the power will not be sold because we have a thing called made order dispatch; if the demand is lean, at that time only the cheapest power gets dispatched over there. However in these scenarios you only will have idle capacities. Today, out of 24000 megawatt gas based generation, in the country, 15000 MW odd generation is working at about 25-26 percent Plant Load Factor (PLF) and the balance is working at zero percent. Now the task before the government is to augment the domestic supply, to divert from non-core sectors and new clients to power and fertilizer and make a pool and then see what is affordable for consumer from point of view of power and what is affordable to government on the subsidy front, from point of view of fertilizer. Because as you said, maybe the royalty will increase but issue is with the fisc and with current account deficit increasing so much, you have little room over there also. Q: Can we understand then that given the concerns that are raised by the Fertilizer Ministry as well as perhaps from the Power Ministry because of the increase in tariffs it is unlikely that the proposal of 8 MMBTU for natural gas from Nelp or what Dr. Rangarajan as well has recommended from Administered Pricing Mechanism (APM) is unlikely to get passed at such higher levels? Khurana: The pricing formula by Mr. Rangarajan Committee slightly takes a very narrow basket over there. If you take the basket slightly on the wider side, you actually may turn up around USD 6 over there. So it all depends. The Kelkar Committee is going to examine this and come back with a formula. We will wait for that. My basic point is that if input pricing are increasing we need to have a mechanism in place where the output prices correspondingly increase and mechanism and the apparatus is put in place by which power can be sold. Either they have a peaking power for gas station or you may have a mandatory purchase because gas is a clean energy. Like Renewable Power Obligation (RPO) you can have gas purchase obligation. Our profile mix of generation purchased by a discom (distribution companies) today, is only concentrated on thermal. There is no hydro. There are hardly any renewable because RPO obligations are not being bought by the states and the gas. So, we need to have a mix of generation portfolio and government in tariff policy needs to come up with an innovative out of box thinking how all these generation products are brought into mainstream. _PAGEBREAK_ Q: You have recently made an effort to get included in the APM queue as well. At the moment most of the gas projects are not in that queue, although fertilisers of course and still companies are in that queue. What is the success now? Have you all been included or are there any chances that you will be included for APM gas? Khurana: We understand that proposal will be considered in the next Empowered Group of Ministers (EGoM) meeting, where we have proposed the power and fertiliser, both the priority sectors to be given same priority. Q: Power companies now want to be included in the APM queue as a priority sector. Do you think that if that is included then you will have to therefore supply less to other sectors demanding power or is there any chance that APM gas output itself can be increased? Sharma: I have been telling this for years that our country is heading towards a major energy crisis. We know that power plants are idling. There is a dire need that they should get gas. So obviously their expectation has lot of rationale. Only issue now is that there a limited amount of APM gas available. So, it is going to be a very difficult to do the allocation against the formulation for the allocation between power and fertiliser. Q: What is the total APM gas available? Is it 60-70 million standard cubic meters per day (mmscd)? Sharma: It is currently around 65 mmscmd. Q: How much would fertilisers require annually? Chander: At present we are using about 42 mmscmd. There is a myth that we are getting 100 percent domestic gas. Out of the 42 mmscmd that we get, we are getting CNG to the extent of 10-11 mmscmd and we buy spot gas. So we are still using the CNG or we are buying the spot gas. Even our requirement is not fully met. We are just at about 70 percent or so. Q: Is it about 30 MMSCMD? Chander: It is 30 mmscmd and 12 mmscmd is imported that is CNG plus spot gas. Q: If the proposal about giving power sector also the same priority as fertiliser sector does come through then how much of this 30 mmscmd quantity get reduced further? How much of an impact will that have? Chander: This is a big question and this issue has to be decided. This issue was taken in the Bombay High Court, where the power was with us. As far as the priority is concerned, they said this policy is good and similar was the case in Delhi also, where they supported the policy. Now since RIL gas has gone down, which hurts their own allocation, they are questioning the priority. The matter is going on in the Andhra High Court also and the stand of the government as of now is that we have the highest priority. Q: You were referring to how important and how urgent now the situation has come through and how India is heading towards energy crisis. When do you actually expect a decision to come through on a gas price hike? Sharma: Based on my experience, I can say that this resolution is not going to come soon. As a result, this uncertainty, the chaos and all the suspense is going to remain for quite some time. Even if the entire administered pricing mechanism (APM) gas gets allocated to the power sector, even then their requirements will not be met. Q: What is the total requirement at this point in time for the existing gas fronts? Khurana: If we want the plants to work around 75 percent plant load factor (PLF), the requirement is about 95 million against which they are getting about 20  million. Therefore the plants are working at about 20 percent PLF. But the issue is very simple. I fully agree that fertiliser is equally important for country’s agriculture. If the urea price is increased, the fertilizer or the fertiliser components in the agriculture produce is not that high as the cost of gas or fuel in the power production. Secondly, the farmers on that side are actually protected by the minimum agriculture price. That price increase in the fertiliser is imputed in the minimum agriculture price. That level is not available on the power side. If you really see, you cannot have agriculture without power. I am surprised because fertiliser use depends on irrigated land. Today, if you do not have pump sets, you are burning diesel over there.  So, someone has to calculate the cost to the economy of power not going to the irrigation pumps and if they are irrigating using diesel over there because it comes to Rs 15 per unit. If you do a combined pool over there, and add about 30 of imported over there, you actually take this plants to about 60 percent. _PAGEBREAK_ Q: Are there any sectors that are able to consume power at a higher price. What are the peak merchant prices that are going without demand faltering? Khurana: This demand concept is not the consumer. In all other sectors, you have consumer demand. Here, the demand of consumer is being controlled by a bankrupt intermediary. I would like to ask the same question. Don’t Gurgaon and Noida have power demand? They are having eight to nine hour power cut over there. Alternately for that all are using diesel generators. That demand is a proxy for the purchasing capacities of discoms, who from last about 30 years have been keeping tariffs at lower levels, state not giving subsidy and the transmission and distribution (T&D) losses increasing; it is around 40-44 percent in some states. So, they are not losses, they are theft. So, if you have a structure in that level of misgovernance, you can’t blame the input and output prices. You need to correct that end also. Q: Exactly how much can be absorbed in terms of a higher gas price? We know that for the moment gas availability is at a minimum. So, if the administered price rises to USD 6 as you said the fertiliser companies will be protected by their end price, if it is USD 6 input, how much of demand can be managed by you, how much of your consumers are willing to pay that Rs 5 per unit or whatever you calculated? Khurana: My idea is USD 6 gives you Rs 2.40, I said 0.40 paisa, it is at Rs 3 if you take the exchange rate as 55 today and Re 1 is the fixed cost that makes it Rs 4 power. By the way the question is all bids being received today, if you see last four bids received by Rajasthan, by Andhra Pradesh (AP), by Uttar Pradesh (UP), the lowest power quoted was Rs 4.85 paisa. Q: Basically, at USD 6 you will find buyers because power purchasing agreements (PPAs) are being struck at Rs 4.85 paisa according to you? Khurana: PPAs are struck at Rs 5.50 paisa also. Today NTPC is supplying power to Delhi at about Rs 5.50. Q: If APM and more importantly NELP gases raise to USD 6 or a little over USD 6, how much more might gas output itself increase in the country? Sharma: Gujarat State Petroleum Corporation (GSPC) for their gas discovery in east coast, asked all for the bids based on the Directorate General of Hydrocarbons’ (DGH) formulation for 5 million cubic meters per day. Total demand against that has come at about 47-48 cubic meters at minimum price of USD 8.5 mmbtu with an average price of about USD 14 mmbtu. I must say the bids have come from the fertiliser companies, from the power companies based on the existing tariff, existing regime. So, one can understand the desperation for both these sectors – they would like to get a price less than the import parity price (IPP). So, the question that emerges out is, if there is a need for the price of the gas to be raised. I can tell you that with the price is getting raised to USD 8-9 mmbtu, ONGC’s own discovery in the east coast which can produce about 25-30 million cubic meters a day that also will be feasible on commercial basis. I do not know the inside story but my own assessment as an industry expert is that you give that kind of price. The D6 of Reliance Industries Ltd (RIL) itself - there is a very good potential for raising the production. The issue is do we remain dependent on the import parity price or do we agree to pay to the domestic producers, a price somewhere in between the current price and the import parity price. I strongly feel that the Rangarajan Committee recommendation kind of pricing must get approved in the quickest possible time.