Gas pricing should be market driven, say experts

There is an urgent need for reforms in the gas sector believe experts who say that natural gas pricing in India should be market driven and not determined by the government.

L Mansingh, former chairman,downstream oil sector regulator Petroleum and Natural Gas Regulatory Board (PNGRB) told CNBC-TV18 that in India 60% of domestic gas supply is controlled by the government but there is no common pricing formula for the same. " There is a need for change in political mindset," he said.

Also Read: GSPC has paid a good price for Gujarat Gas: ICICI Sec  

He further added that India currently has 15 different rates ranging from USD 2.52 per million British thermal unit to USD 16 per mmBtu for natural gas produced from domestic fields. For instance, since 2009, for instance, the Centre has approved a gas price of USD 4.20 per mmBtu that is valid for a five-year period for KG basin gas. Meanwhile, gas consumers have reportedly been importing liquefied natural gas at up to USD 16 per unit

While agreeing that government needs to find a solution for market driven pricing, energy expert Narendra Taneja believes that because of irregular pricing, global players may not be enthused to invest into the sector.

While asserting that a new mechanism for pricing natural gas is critical, experts also believe that the growing shortfall in production in the deeper offshore in the Krishna-Godavari basin, India's biggest gas find in three decades, has led to calls for import-parity pricing for the domestic output.

Industry watchers add that due to insufficient fuel supply, gais fired power plants are operating at 30% plant load factors (PLF).

Below is the verbatim transcript of the interview

Q: Is it now quite clear that in any case gas prices cannot be revised up until 2014, it’s a given?

Mansingh: The basic problem is that there is a huge demand-supply gap in the country and the demand for gas is growing at a very fast rate, so how do you tackle it? 60 per cent of the gas in the market is being controlled by the government, the price is determined by the government and allocation is made by the government. Unless you create a competitive market, I don’t think you can even begin to solve this problem. Price is one of the factors which is causing this problem.

Q: A lot of hope and power plant construction was pinned on KG D6 gas. We now understand that Reliance is asking for the price of that gas to become market determined to a crude oil linked formula, which works as follows - gas price to be equal to 12.7 per cent of the Japanese Custom Cleared Crude price. At the moment, that might work to about USD 13. Should that be the way forward or do you think that becomes politically intractable?

Taneja: Unfortunately, the whole gas sector is highly politicised, it is run by the people who do not really understand the business, and that, is the misfortune of the gas sector, as a whole, in this country. Typically, we have got 15 different prices for gas in the country ranging from USD 2.5 per unit to USD 15 per unit.

Recently, the government of India-backed companies have signed an agreement with Turkmenistan for TAPI, that is Turkmenistan-Afghanistan-Pakistan-India gas pipeline. The lending cost for that will be USD 15 per unit. At the same time, Government of India’ s (GoI) own companies like ONGC are getting as little as USD 2.5 per unit.

If you look at Krishna-Godavari (KG Basin), which is a deep water block, the cost of production is so high but the price that the government has fixed is very low. So as long as the government is going to do everything from policy making, to price control, to distribution, to allocation etc, I don’t think it will work and will be a disadvantage for the industry and the economy in this country. I think the government needs to aim. The biggest problem is at the level of the mindset.

Second, my question is does the government understand the business of gas? No, they don’t. They are not competent. That is the not job of the government. The government’s job is to make policy and then to have a good effective regulator in place. They should leave the rest to the market forces.

Q: What could be the feasible solution to the gas pricing formula, which would help both the gas consumers as well as the producers?

Taneja: The most feasible solution is that the government should not be rigid in terms of fixing dates; say March 2014 or whatever it is. I think government has to look at the situation and find market driven solutions. The market driven solution is that you pay the price that you need to pay so that you have more gas available, you incentivize gas production in the country and you make India more attractive on a competitive market for international supplies as well. Basically, there is a need to go for a complete overhaul. That’s the only solution.

If you are regulating the price and there are 15 different prices in the country, who will invest in the country? For instance, they have invested billions of dollars in KG-D6, British Petroleum (BP) has also moved into that block but you insist that you will not pay this particular price before a certain date. Also, there is no guarantee that you will really revise it to the level that would be attractive for the company or for the investors. Is that the way to look at it? Do you want more gas to stimulate the economy? Do you want more gas because this century belongs to gas? I don’t think the government of India is prepared for that. My answer is let the market decide the price, let the government focus only on making policy and regulation.

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Q: Just as we cannot liberalize kerosene, petrol and diesel prices any time soon, we have a working situation, as Mr. Taneja put, gas is available at USD 2.5 per unit. A lot of industries are working on that arithmetic; some of them are working on USD 4.2 while others are working at even USD 15. How do you start disentangling the situation, what is feasible from now to the end of this government’s term?

Mansingh: I don’t see any problem at all. All you require is a change in the mindset and political will because what we are not appreciating is that in the D6 gas and the other licenses, which are going into production under LLP, the bulk of the profit gas is in the government’s kitty.

Why can't you adopt a system of directly subsidizing whomsoever you want to subsidize? It will, in fact, be less costlier to the government exchequer who will gain and you can allow a competitive market for the natural gas to evolve, which would actually create a potential for huge investments in infrastructure and the gas market.

Q: The price hike to USD 14 at this point looks little unviable because of the political opposition etc. But if this comes through, how much do you think power producers will be able to absorb such a high gas price?

Khurana: My idea is power producers do not mind moving to a competitive market, but then, you cannot have a competitive market only on the input side and the output side is completely controlled. That sets in complete distortion in clearing subsidies. What is being talked of moving on to market price, in the final run, we need to move to market pricing on gas petroleum and power. But looking at the affordability issue and gas pricing, I think that will need to be calibrated to the affordability level, and people getting used to it. The government is taking steps slowly to increase prices and increase tariffs.

Along with that, in the power sector, my idea is to have the same tariff throughout the day is not possible. The government needs to have regulation where you have differential tariff. Expensive power, which is the gas based power, can easily come in the grid late in the evening, between 6 -10 pm when power is sought for. Nowhere in the world Is power charged at the same rate from 2 am to 8 pm. You need to price differentially and there is a way of getting the expensive gas based power in the system.

Q: How much will tariffs have to be hiked eventually if the gas prices are hiked? What will the equivalent hike in tariff be in your mind?

Khurana: It always depends on what is the price of gas. If you put the price of gas at USD 10, then it comes to 40-45 paisa equivalent to the dollar on the kilowatt hours over there. So, it comes to about Rs 4.50, if you add the fixed cost of about Rs 1.25, then you reach to Rs 5.5. At Rs 5.5, power is easily absorbable in the peak time.

Q: I take your point that at USD 10 per mmbtu of gas, probably the price to a consumer in terms of power would be Rs 5.5 per kilowatt. But our correspondent broke the story that RIL’s proposal is actually for USD 13 per mmbtu going by the current formula. Do you think that it will be very difficult to absorb for the consumer at the moment?

Khurana: It will be very difficult to be absorbed for the consumer but my idea is you need to move slowly on all sectors.

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Q: That point that it has to be an incremental move is taken, but what is the resistance level or what is the absorbability threshold? Your point is that USD 10 per mmbtu can be absorbed and USD 13 per mmbtu would be tough.

Khurana: I would put it very simply; even USD 10/mmbtu is not absorbable throughout the day. In the day time tariff, the sensitivity is about Rs 3.5-4 per kilowatt. The moment you take it back, the Discoms stopped buying power at all. So you have a situation where you had a lot of power cuts and power was begging at exchange over there.

Q: Given where the international prices are at, where do you think Indian prices should be at? Is the USD 13-14 price hike to that level actually justified at this point? Renegotiation of the Krishna Godavari Gas price comes up any way in 2014. At that time, do you think a formula like this would work or do you think at that time USD 13 or thereabouts would be difficult, and therefore, is a likely solution between USD 8 or thereabouts?

Mansingh: I don’t think in the Indian market as in the international market, you can have a uniform standalone price of USD 13 or USD 10, it will be a segmented market. It would be available at different prices depending on the source, the risk level etc. The spot prices would be the highest and depending on the international spot markets.

But what you are not appreciating is that, let’s assume for the sake of argument that the government allows Reliance to charge USD 13-14 for gas but they have to market that gas. How do they market that gas? When you enter into a long-term take or pay agreement with anchor load consumers like power producers and bulk consumers, the price would be much lower. Don’t assume that there will be one market determinant price. I would expect that the bulk consumers would always get gas at a much cheaper rate.

Secondly, please don’t forget that we had two major grid collapses in the recent past. Now, the critical factor in the power sector is peak hour demand management. Peak hour demand management can only be done by gas based power plants in different regions of the country.

If that happens and you take the trading rate of power, not the regulated tariff of power, it should give you an idea of question of affordability. Particularly when you are talking about the action of coal as the only way, which has been endorsed by the Supreme Court, the act is already there. Gas accounts for a very small portion of power generation in this country.

Q: How would you move on stocks like Reliance or something like ONGC, Oil India etc?

Taneja: It depends. My own assessment is that when it comes to exploration production, you mention Oil India or ONGC, these are upstream companies. We have to give more incentive for exploration production of gas in this country.

Bengal, the Andaman region and Tripura are supposed to be floating on gas. We are discussing the price here but at the same time, when the government comes with a right policy and the right approaches, you will find this gas actually coming into the market very soon over the next 4-7 years. We also have to look at it and then leave things to the market to the extent you can.

Right now what's happening, we are not looking at that side; we are only looking at one side that is government controlling the price. But I am saying that these regions are floating on gas, please do something about that. Instead of incentivizing gas production, you are punishing them, you are punishing companies in the Bengal region, which have done well, you are punishing Cairn energy in Rajasthan, you are not helping them, you are not facilitating production. Unless we are able to concentrate on that side, we are looking at the wrong side. Pricing is fine but look at the other side as well, which is more crucial.