Gas pricing: more competition needed & artificially fixed prices

Gas pricing: Next big mess



Equity considerations are leading the Government towards a gas-pricing regime, which will only worsen the problems of the sector. 'What is' needed is more competition, not artificially fixed prices.

Until recently, the pricing of natural gas was of interest only to those in the business. Now, thanks to the Ambani wrestling match, it has become a topic of dinner table conversation along with cricket and Big Boss.

Few discussions are more confusing or more confused. And the reason for that is the number of ways in which gas is priced in India. At present, there are several gas pricing regimes. One gives a price of $2 per million British thermal unit (mBtu) while yet another gives to $7 per mBtu.

Various Pricing Regimes

The various price regimes prevailing today are as follows: gas sold at an administered price (APM gas); under production sharing contracts (PSC), such as those from joint venture fields like Panna-Mukta-Tapti; and under the New Exploration Licensing Policy (NELP) like the Reliance Industries operated D6 block.

Apart from these there is a price for imported regassified liquefied natural gas (RLNG), and a spot LNG price that varies from time to time. The administered price for the gas produced from Government-nominated fields has been set at about $2/mBtu, except in the Northeast, where it is $1 to $1.2/mBtu. APM gas applies to gas fields that the Government has assigned to ONGC and Oil India Ltd on nomination basis prior to the NELP regime.

Then there is gas price levied by producers who have got fields under production sharing contracts ranging from $3.5 to $5.73/mBtu. The price of gas from imported RLNG in respect of term contracts is over $5/mBtu. Completely befuddled? There's more because sometimes the weighted average of these prices is used, as once co-mingled in a pipeline, the sellers or buyers cannot make commercial distinction. Sometimes a notional price is used, calculated via quantities as in the case of the Hazira-Vijaipur-Jagdishpur (HVJ) pipeline -the customers get an allocated quantity of gas at a controlled price, and pay re-gassified LNG price for the balance.

To bring some sanity into the crazy system, the Government is inching towards another idea: a uniform gas price regime. All consumers, private and corporate, will get gas at a price fixed by the Government or any agency so appointed, as is done in the case of petrol and diesel.

Alternatively, all producers will be told to sell gas to a central marketer at a uniform price. As the energy base of the economy switches over to gas, the political benefits of this are evident. As against a government-determined price, there is the alternative of a market-determined price.

Most countries follow this system. But open market pricing works best when there are many producers. Else, the danger of collusive pricing and profiteering exists.

Also, the proponents of government-determined prices say that in an era of shortage, open market pricing is not a solution. But recall: this is what they used to say about the telecom sector also.

It is clear that the Petroleum Ministry has taken, its cue from the power sector which as everyone with an inverter knows is a shining example of success. There the end-consumers get power at the same price because the SEBs purchases power from different sources and then sells at a uniform price.

'Can there be a pool price as in R-LNG? This is a weighted average of expensive and non-expensive RLNG prices. It is used for LNG to make it affordable for the consumer.

Besides, pooled prices can only be worked out for long-term contracts and currently all the domestically produced gas is sold on long-term contracts.

Nodalagency

A uniform price regime would also mean setting up a nodal agency, which would monitor the pool price, and also work as an accountant taking care of the differential between the producer price and the pooled price. For example, if the price of APM gas is $2 per mBtu and the pooled price is $4 per mBtu, where will the difference go?

There are other questions as well. Will the producer get it directly or will there be a body, which would keep account of this money? What will be the right price - at any given point of time it would be difficult to keep all the stakeholders happy? If one assumes that producers "should subsidise for consumers then what should be the uniform as well as affordable price for sectors such as power, fertiliser, steel, city gas distribution, petrochemicals and ceramics?

It is clear from the above that a uniform price regime alone, though politically attractive, is not a solution. Altogether the best policy would be to adopt the telecom model rather than the power model, namely, increase competition and leave the rest to the market to work out.

By Richa Mishra, Business Line, New Delhi, 11 November 2009