In the course of the discussion, Salil Garg provided a counterpoint. He said that in case the gas price had been increased on the basis of the argument that it would help in the exploration of certain unviable blocks, then the new price should have been applicable to only those blocks and not across the board as was now the case. He added that even if this decision attracted new investment, how would that ‘help’ the operators of blocks that were already viable at a gas price of $4.2 per mBtu. Garg said there would be ‘windfall gains’ for those operating the blocks which were selling gas at $4.2 per mBtu.
Other critics also pointed out that private operators like RIL were in a position to garner profits at the existing price of gas. Prabir Purkayastha of the Delhi Science Forum noted in an article in Newsclick.com (4 July 2013) that BP would not have decided to invest $7 billion for a 24 per cent share in the KG-D6 project when the price of gas was $4.2 per mBtu if this price of gas was not considered sufficiently viable. Ninan reminded his readers of the interview in 2009 (quoted earlier) with ‘the head of Reliance’s gas business’—RIL’s P.M.S. Prasad—who had told Business Standard that ‘Reliance would make a profit in its gas even at $2.34 per mBtu’. Ninan added: ‘The rupee was then nearer 47 to a dollar than 60 (so he was talking of a rupee price of about $110, against the $500 that has now been approved for next year). So does it stink?’
The government, of course, claimed that it was acting in the interests of the nation saying that the price hike would ‘incentivise’ exploration and bring in higher revenues. It also claimed that the move would lure foreign investors, from whom responses had been at best lukewarm. Finance minister Chidambaram, one of the main votaries for the gas price hike, said that a combination of two factors, low domestic production of gas and import of LNG, was proving expensive for the country. At a media briefing on 28 June, the day after the CCEA decision to increase the price of gas, he said the country had to produce more gas. He told journalists at the conference room of the government’s Press Information Bureau (in Shastri Bhavan in central Delhi):
Domestic investments have come down to $1.8 billion in 2011–12, from $6.3 billion in 2008–9. Compared to this, in the last ten years, Indian companies have invested $27 billion in the oil and gas sector abroad and another $10 billion is in the pipeline. To stop this trend, we have to increase exploration in the country. No global company would invest without a fair price.
Chidambaram’s view was not endorsed by all. An unnamed former petroleum minister was quoted in Rediff.com (28 June 2013) saying: ‘Internationally, India is not perceived as a country rich in hydrocarbons as, say, Azerbaijan is. We are fooling people. There will be some investment here and there, but India is not likely to get big-time investment for its gas reserves.’
Petroleum minister Veerappa Moily, who chose to let Chidambaram do most of the talking during the media briefing while sitting next to him, said that there was ‘over 3 trillion cubic feet of gas discoveries lying to be exploited’. He said that these had not been cleared for commercial exploitation ‘by our own DGH’ as they could not ‘be monetised at a price of $4.2 per mBtu. The minister added:
For every $1 increase, our outgo would be $1 billion and the inflow would be $500 million in the form of royalty and other taxes. While the Rangarajan committee came up with its formula taking (an) average of long-term and spot Liquefied Natural Gas and global prices, now, we have cleared it (the price of gas), omitting the (inclusion of) spot prices (in the pricing formula).
He said officials in his ministry had calculated the price of gas on the basis of the Rangarajan Committee’s formula excluding spot prices and, according to them, the price of gas in late-June 2013 would be around $6.3 per mBtu and this price was expected to go up to $8.4 by April 2014.
The government had been justifying its policies of aligning domestic energy prices with international prices, be it the prices of petrol, diesel or coal, on the plea that high subsidies were placing an unbearable burden on the exchequer even if such policies had fuelled inflationary fires. In the case of gas prices, however, the government opted for a diametrically opposite strategy and turned its own logic on its head. It chose to hike gas prices at a time when world gas prices had plummeted and the exchange rate of the rupee had come down to Rs 60 to a dollar (it came down further subsequently before stabilising at around Rs 62 to one dollar in late 2013 and early 2014), thereby laying itself open to charges of hypocrisy and worse—that it has blatantly sought to favour a few at the expense of many.
Chidambaram stated that there could be a higher subsidy outgo for producers of power and fertilisers in the ensuing months before the price rise would be notified. This was rather curious for an individual who had so far been steadfastly arguing against higher subsidies. The finance minister suggested that the government could subsidise ‘user industries’ such as power and fertilisers. He admitted that ‘only output prices, the price payable to gas producers’ was being fixed and that the price at which gas ‘should be supplied’ to a power plant could be decided in the run up to 1 April 2014. ‘It could be by tweaking prices or it could be by bearing an additional subsidy. There are various methods but at the moment we are not addressing those issues,’ he said.
Moily added that that his ministry would work out detailed plans in conjunction with the power and fertiliser ministries and present these to the finance ministry so that the higher gas price did not impact consumers in a big way. A few days after the announcement, Chidambaram spoke to the Press Trust of India which reported on 4 July that the minister had reiterated that the power sector and the fertiliser sectors had concerns and that they would be addressed before 1 April 2014. Former power secretary Razdan advised caution on the question of subsidies in the course of the discussion on gas prices on Rajya Sabha Television. He said:
The finance minister has said that subsidies may be a way (to compensate consumers). But I would like to see (what would be) our financial situation on 1 April next year and whether we can bear that subsidy. Both ONGC and OIL have been giving subsidies from their side to stabilise the prices but I do not think that any private power producers have been paying that subsidy. It is not clear whether we will ask the private sector companies to share a portion of the subsidy, a moot point.
Who will bear the subsidies? This was a question that R. Jagannathan, editor of Firstpost.com took up in a surprisingly candid article—candid, because Firstpost is part of the Network18 group which has been financially supported by the Reliance group. Jagannathan commented that ‘celebrations (over the higher price of gas) would be short-lived’ since the government’s decision ‘was neither reform nor good politics nor good economics’. In a situation in which the input price to be paid by gas users (power and fertiliser consumers) was unclear, who would carry the burden of a bloated subsidy bill in case input prices were fixed lower than the output prices that would be obtained by the producers of gas, he wondered. Jagannathan reminded his readers that in the case of oil subsidies, both taxpayers and public sector oil companies had taken the hit for the ‘government’s political decisions’.
In a report in Business Standard (29 June 2013), it was stated that although ONGC’s earnings would increase, these may not be that high if the public sector bore some of the higher burden of subsidies. ‘For ONGC, every dollar increase in gas prices increases earnings per share (EPS) estimates by 8-9 per cent,’ the newspaper wrote, adding:
With a cent (100) per cent rise in price to $8.4 a unit, ONGC’s EPS will go up 35-40 per cent. With the government insisting that oil and gas producers share the higher subsidy doled out by oil marketing companies to consumers, the gains for ONGC might not be that high. Expect modest growth of 7-8 per cent earnings. CRISIL (formerly Credit Rating and Investment Services of India Limited) says ONGC’s profits before depreciation, interest and tax would rise by $13,000 crore.
On RIL, the Business Standard report stated, ‘Every dollar price rise will give a boost of 2 per cent to the EPS of RIL by 2014-15. T
he question is whether the 100 per cent rise in gas price is enough for RIL to revive production from the Krishna Godavari fields.’ The article quoted Angel Broking, a stocks advisory firm which had put out a positive outlook for the company:
RIL is likely to be a key beneficiary of the increase in gas price as unlike PSU upstream companies it does not bear any subsidy burden. Hence, we raise our gas price estimates for RIL to $8.4/mBtu, which results in our EPS (earnings per share) estimates increasing by 6.8 per cent for FY 2015. We believe that the increase in gas volumes from KG-D6 block will be a key catalyst for RIL. However, given the recent rise in the stock price, we maintain our neutral rating on the stock.
The big question that went unanswered was why the government chose to designate the price of gas in American dollars at a time when the exchange rate of the Indian currency vis-à-vis the dollar was weakening and had breached the Rs 60 mark? Why should electricity be priced in dollars when the revenue earned would be in rupees? Why should the government lay the burden of the exchange rate risk of gas produced in India on the consumer/taxpayer? Jagannathan offered an answer:
It appears that the gas price announcement was intended to achieve two non-reform goals of the UPA: given the drastic fall in the rupee, the government needed the market to perk up in order to reverse capital outflows; it also needs a buoyant stock market to meet its fiscal deficit target. These targets can be met only if public sector shares can be sold to investors. In June, foreign institutional investors sold equity and debt to the tune of over Rs 40,000 crore. The gas price announcement temporarily reversed that trend.
The Confederation of Indian Industry (CII), which had welcomed the gas price hike, came out with a caveat a few days later. S. Gopalakrishnan, president of CII, said a ‘dollarised’ gas tariff was a difficult proposition for industries, especially in light of the rupee’s slide in recent weeks. ‘I do not believe that the price of gas (produced in India) ought to be set in dollar terms’, he was quoted by the Hindu (5 July 2013) as commenting from Bangalore. The following day, the CII did a complete about-turn and issued a statement denying that the apex industry association was opposed to the designation of the price of gas in US dollars. Presumably, Gopalakrishnan was airing his ‘personal’ views and not those of the CII.
There was a general perception that the government had taken the decision to increase the price of gas in a huge hurry. With elections coming up, and the possibility of a new political dispensation in power in New Delhi, the idea was apparently to bind the next government to a decision that had already been signed, sealed and delivered. The fallout, if any, would be the headache of the government that would take charge after the 16th general elections scheduled to take place in April–May 2014. It was argued that the government’s decision on the price of gas could have been taken closer to 1 April 2014 to get a better sense of the latest world prices of gas. As Firstpost’s Jagannathan observed:
If the benefits of a gas price hike are to be had upfront (which is what the markets are celebrating) and the costs will be shifted to the next government (which will have to take the painful decision of bearing more subsidies, or reducing the gas price at the output end), this is clearly a scorched-earth policy. The UPA has essentially lobbed a ticking time-bomb to the next government.
He suggested that when gas users incur losses and have to be ‘rescued by the taxpayer or (a) bank’, it could well damage the long-term interests of the gas sector with future demand for gas-based fertiliser and power plants getting stymied. Ninan too expressed a similar concern:
The real-life question now is, who would set up a gas-fired power station at this price? Power company experts say that every dollar in the price of gas contributes (depending on various factors) between 40 and 50 paise to the cost of a unit of power. Along with fixed capital cost, the effective cost of power at the new price for gas, at the generating station before transmission and downstream costs, would be about Rs 5.50 per unit. That compares with about Rs 4.50 per unit for a power plant using imported coal. Power based on local coal would be much cheaper.
Of the 912 billion units (BU) of power generated in India annually, around 7.5 per cent or 65 BU comes from gas-based plants. The price rise decision will increase the cost of generation for gas-based independent power producers (IPPs) from the current Rs 4.20 a unit (fixed cost of Rs 2 a unit and variable cost of Rs 2.20 a unit) to Rs 6.20 a unit. ‘If the higher cost is spread across the entire annual generation of 912 BU, power prices will rise by roughly 15p per unit,’ Salil Garg of the Fitch group told Business Standard (29 June 2013).
The revised generation cost of Rs 6.20 a unit for these companies is in stark contrast to the average cost of generation for coal-based power plants at Rs 3.50 a unit. ‘The immediate gas price hike to $8.4 per mBtu will increase fuel cost for gas-based IPPs by around 90 per cent. (The) off-take risk for gas-based power will increase even in long-term Power Purchase Agreements (PPAs),’ Garg added. During the discussion on Rajya Sabha TV, he had said that the gas price rise would have a cascading effect on the power sector: ‘If the effect of the price rise was to be passed on to just the 65 BU gas-based units, the total impact would be close to Rs 12,800 crore per annum. It would have to be borne by state governments or consumers.’
But that would not happen now. Distribution companies (discoms) in the power sector were in the red by Rs 2,00,000 crore in June 2013 and their financial position would further worsen with the hike in gas prices. Gas-based power plants with a total capacity of 28,000 MW have either been commissioned or are to be commissioned. Many of them will become unviable and sick once the price of gas rises to $8.40 per mBtu. At one stroke, the government has increased its potential subsidy burden by more than Rs 40,000 crore per year, if not more, claimed Prabir Purkayastha in Newsclick.com (4 July 2013). In this context, Jagannathan’s comment that new investments in exploration of hydrocarbons ‘cannot be done in isolation’ needs to be noted. The energy sector includes oil, gas, coal, coal-bed methane and shale gas and prices of all these need to be ‘reformed’. He argued in favour of market forces and contended that the way forward would be to let ‘prices of fuels find their own levels’, so that businesses can make a rational decision on which fuel to use for what kind of output. Ninan was more forthright: ‘What the Cabinet has done is to make what is emerging as the world’s cheapest and cleanest fuel an uneconomic proposition.’
Possibly one of the most serious questions raised time and again is the decision to link domestic gas prices to that of imported LNG, whether it be from Qatar (which accounts for 80 per cent of India’s LNG imports), Oman, Australia or the United States. India’s stated gas price from 2014 is probably the highest at $8.4 per mBtu. Against this figure, prices in the US in late-June were $3.80 per unit, Oman (from 2015) $2.2 per unit, Qatar $2.5, Canada $3.8, Abu Dhabi $2.3, Malaysia $4 and Bangladesh $3.5. ‘Domestic gas prices cannot be in parity with international prices. Our prices have to be suited to our needs. The gas price should have some linkage to other domestic source such as coal,’ petroleum secretary S. C. Tripathi told Lola Nayar of Outlook (8 July 2013).
Nayar indicated in her article that there was a move to place a cap on prices. She quoted an International Energy Agency (IEA) warning that any attempt to push prices beyond $5 per mBtu would induce the US to return to coal, after years of cutting back in favour of cleaner gas. She cited an example of the cancellation of two long-term contracts of LNG with Chevron of Australia by South Korea in early 2013 to renegotiate better deals. India, on the other hand, arrived at the $8.4 figure through a complex formula which among other factors uses prices in Japan, which (as already mentioned) has one of the world’s highest prices of gas. ‘Piped natural gas and LNG are different since there are many added costs in the pricing of the latter, including liquefactions (also known as liquefication), transportation and taxes,’ said T.N.R. Rao, another former petroleum secretary, who is quoted in the same Outlook article.
Discussions about the global energ
y scenario at the time of concluding this book in March 2014 was dominated by talk about the exponential increase in shale gas production in the US which has raised its share of controversies and doubts since extraction of shale gas has environmental side-effects, and also takes away the focus from renewable energy. A June 2012 publication titled Oil: The Next Revolution brought out by the ‘Geopolitics of Energy Project’ at the Harvard Kennedy School Belfer Center for Science and International Affairs (provided to the lead author of this book by an energy expert who chose anonymity) stated:
Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.
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