See govt fixing gas price at $6.5-8.5/mmbtu: Feedback Infra

The Cabinet Committee on Economic Affairs (CCEA) is likely to take a decision on a new gas pricing regime starting next fiscal today. Vinayak Chatterjee, chairman, Feedback Infrastructure expects the government to hike the prices of gas in the range of USD 6.5-8.5/ mmbtu.

Additionally, Chatterjee says once the gas price increases will lead to an increase in the domestic supply.

"That is certainly an expectation in the market that there will be an increase in output and availability from domestic sources," says Chatterjee in an interview to CNBC-TV18.

Today’s meeting will be eyed by big power players as the earlier proposal was only to hike ONGC and Oil India’s administered price mechanism (APM) gas price but was later changed to new gas price regime for all players. The changes will come in effect from April 1, 2014.

Below is the edited transcript of Chatterjee’s interview to CNBC-TV18.

Q: Put this whole gas price hike business in perspective for us, what it does to the power sector, what it eventually does to the gas availability issue in India and how significant it is or could be from a macro perspective?

A: It is a tangled web and I believe the Cabinet Committee on Economic Affairs (CCEA) along with the empowered group is going to be deliberating and hopefully taking a decision on gas price either today or tomorrow, possibly today.

The spectrum of expectations range from USD 13 per unit as per the presentation made by a group of private sector honchos to the Prime Minister (PM) justifying it on the basis of linkage to petroleum prices, to as low as some people saying that the current price is at USD 4.2/mmbtu is as good as it gets because the long-term well-head prices from Qatar, Malaysia etc are at those prices.

Then, there is a USD 6.6/mmbtu point which has been crystallized around the power ministry and there is an USD 8.4/mmbtu, which has been crystalised around the Rangarajan Committee report. So, my guess is you are probably going to see a decision somewhere between USD 6.5/mmbtu and USD 8.5/mmbtu and both these extremes are within the realm of possibility.

The question then is that what happens to availability. The expectation on gas is that any increase in the price now, will hopefully see an increase in domestic supply. That is certainly an expectation in the market that there will be an increase in output and availability from domestic sources.

Also, the US Secretary of State, John Kerry’s visit to India has taken the discussion forward on US allowing India to import energy, which right now is banned because India is not an free trade agreement (FTA) country, it is not a country that is signatory to the FTA with USA. And USA only approves export of gas including shale gas to FTA approved countries. But we hear that this provision maybe relaxed or may have already been relaxed. This announcement will possibly happen when the Vice President of USA visits us later in the year.

We have got the expectation of domestic gas availability rising. We have got expectations of US gas coming in. The real issue is finally that even if this gas is made available at this price to power generating plants, then the question is the end price. The end price of gas produced power could be anywhere from Rs 6.5-7/unit upto Rs 10/unit depending on various issues of costing, logistics, supply etc.

In the absence of a peaking power policy and in the absence of any policy that mandates distribution companies (DISCOMs) to buy gas as a source of energy diversification and clean energy, in a situation today where DISCOMs are not even buying thermal power at higher rates because of their fear of increasing their losses and their resorting to load shedding, the big question is that assuming there is a positive answer today from the cabinet on a gas price increase and these other perspectives falling to place, what will happen to gas plants that produced power.

The two requirements are some kind of a purchase obligation by the DISCOMs, maybe a huge degree of lifting by the government buying agencies and peaking policy along with an obligation. The other development in the market that is gathering momentum is the fact that many customers who are today buying at tariffs which are set by the regulators have a propensity to pay higher.

States like Maharashtra and Andhra Pradesh have already given dispensations to say that if there is a willing buyer at a higher price and a willing seller particularly in gas based selling plants in Andhra Pradesh -- the regulator has given a dispensation -- then they allow these two parties to mutually interact and set a price.

If this movement cascades across the country, we have a huge number of customers from malls to factories to institutions which are running their facilities on digisets which probably costs Rs 15 a unit.

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So, if this facility of – assuming that the power obligation and peaking power policy, etc take time, even if the government moves ahead allowing willing buyer and a willing seller to negotiate a higher tariff that reduces genset uses, then there is significant hope for gas based power.

Q: Are you confident that this decision will come through today, there have been numerous postponements of this meeting, is it your sense that the government is stepping on the panic pedal with respect to policy and they have all these ministry power, fertiliser etc on board with their decision because that is what is of urgent need right now, to move with this fast?

A: My information is that there is a reasonable degree of convergence that has happened outside between the ministers, between people who are empowered to take their decisions. I think a political and administrative convergence has already happened so I am reasonably optimistic that today we are going to get the decision.

Q: Let me turn the question around from the power side to the gas side, is it your understanding that a price hike to 6.6 going up to 7.5-8 over the next couple of years is good enough for private gas players to start exploration or become far more aggressive in trying to ramp up their gas production?

A: I do not think I am qualified to answer that question because the gas production is a combination both of commercial pricing as well as of technical difficulties in extraction. How the two will play out, we will leave it to the players who are operationally involved. This spectrum is so wide that at one level, you have a group of private sector operators including multinational investors in India who can make a strong case to say that gas prices should be linked to international fuel prices. One of the indicators for Asia is the Japanese Crude Cocktail (JCC) and if one takes that, then there is a logical reason to say that USD 13 per unit is a fair price. That is one end of the spectrum.

At the other end of the spectrum, if one takes a different point of view which says that linking gas prices to international commodity markets which are manipulated by commodity traders, hedge funds etc is no real medium-term or long-term index of what a price of a natural resource should be.

Hence, the right way to do it is to see what are the long-term contracts from countries that produce gas, from say whom India imports, like Malaysia, Qatar etc. This group will make a point to say that the existing price of USD 4.2 per unit is a fair price so, why even increase that. Then in between there are other arguments.

There is a group that feels USD 4.2 per unit is a decent price based on this bundle of logic, well-head prices of neighbouring countries and there is another group that says the best thing is link it to international petroleum and liquid fuel prices, use JCC and then one gets a price of USD 13 per unit.

So, the theoretical argument is a very interesting one because one can take a position between USD 4 and 13 and in any case there is the Dr Rangarajan Committee in India which officially has submitted its report and says at this point of time, the right price is USD 8.4.

Hence, it is really a tricky issue for the government but with this perspective, the possibility that a political administrative decision that tries to marry different points of view would certainly swing between USD 6.4 and 8.4 per unit. Somewhere in this range, one will get the decision. The issue is skating on thin ice because whatever is done, the government is subject to criticism but at the same time it has to go ahead and give a decision.

Q: The expectation also is that once this gas pricing issue is announced, the government is going to follow that up with fairly aggressive price increases both on fuels like petrol and diesel but also prickly issues like liquefied petroleum gas (LPG), are you getting that sense that the government is willing to bite the bullet on all these oil pricing issues and increase prices in a dramatic fashion because of what has happened globally as also with the currency?

A: The signal that the government is already in a mood to align energy prices in steps to international prices is something that Montek Singh Ahluwalia has been saying for a long time. Whatever we are going to see is a journey where month-by-month or once in two months, there will be a series of incremental increases.

For example, 19 states have increased their tariffs by anywhere from 19 percent to 40 percent, Uttar Pradesh (UP) has just increased by 40 percent. So, even a 40 percent increase in power and in UP it is not just industrial, this 40 percent is to agricultural users and domestic users. So, one is seeing consumers of both domestic power as well as petrol and diesel getting aligned to an economic format which leads them to expect a certain rise few times a year. So, the gradualism or incremental increase to a targeted goal is the way. Indian policymakers will take us down that road.