Only four of the current big oil suppliers (more than 1 mbd [million barrels a day] of production capacity) face a net reduction of their production capacity by 2020: Norway, the United Kingdom, Mexico, and Iran. For the latter two, the loss of production is primarily due to political factors. All other producers are capable of increasing or preserving their production capacity. In fact, by balancing depletion rates and reserve growth on a country by country basis, decline profiles of already producing oilfields appear less pronounced than assessed by most experts, being no higher than 2 to 3 percent on a yearly basis.
This oil revival is spurred by an unparalleled investment cycle that started in 2003 and has reached its climax from 2010 on, with three year investments in oil and gas exploration and production of more than $1.5 trillion (2012 data are estimates)
Thanks to the technological revolution brought about by the combined use of horizontal drilling and hydraulic fracturing, the US is now exploiting its huge and virtually untouched shale and tight oil fields, whose production although still in its infancy is already skyrocketing in North Dakota and Texas.
These comments and observations highlight the argument that has been made by the commentators that the government of India, which supposedly favoured market-friendly policies, used a bureaucrat-dominated committee’s recommendations to go in for an administered price of gas that favoured a few corporations at the expense of consumers. Ninan ended his editorial by asking: ‘Is any more proof needed that India’s reforms, so-called, are businessfriendly rather than market-friendly?’ Jagannathan added that in such a situation ‘businesses take both the risks and rewards of global and domestic price movements’.
The Indian media was not uniformly critical of the government’s decision to increase the price of gas. The Economic Times (28 June 2013) and the Indian Express (29 June 2013) carried editorials lauding the ‘reforms’ undertaken. The ET unabashedly praised the government’s decision that was like a ‘shot in the arm for Reliance Industries and ONGC’, and would encourage ‘a surge in investments in exploration’ even as ‘cost of electricity, fertilisers and CNG’ would rise. ‘After dithering over the decision for many months, the Cabinet Committee on Economic Affairs (CCEA) finally overruled stiff opposition from gas customers and took the courageous decision, which analysts said will quickly raise India’s exploitable reserves of gas as higher prices will make more discoveries commercially viable,’ the editorial noted. The IE called it a ‘soothing price hike’. It opined that it was not economical for the likes of ONGC, OIL, Cairn and RIL to ‘invest billions of dollars looking for gas in the deep seas—that is where the bulk of the gas is believed to be’ without a hike in prices. Conflating the PSUs and the private sector together, the editorial commented that while RIL-BP met the prime minister ‘to argue this, even the state-owned ONGC made the same point to the petroleum secretary’. The IE noted that there would be an increase in the funds that flow into the sector from global players like BP, or others who want a slice of the pie. Indeed, with the government clamping down on the freedom of firms to price their product or to sell it — something the private firms thought was guaranteed to them — there has been less and less interest in various auctions of oil blocks in recent years.
The decision was predictably welcomed by the RIL-BP combine. P.M.S. Prasad, RIL’s executive director was quoted by Business Standard (29 June 2013): ‘Any movement toward market price is good for upstream industry. This decision will bring in the much-needed investments in the hydrocarbon sector that are required to reduce the debilitating effect of increasing imports upon the economy.’ Sashi Mukundan, head of BP’s India operations, spoke of ‘incentivised exploration and production in the country and development of competitive gas market.’ The Association of Oil and Gas Operators (AOGO), an industry body that counts RIL, ONGC and Cairn India as its members, issued a statement welcoming ‘the effort to create a stability of pricing regime and delinking of gas prices from the demand side issues’. It said that the ‘new prices were likely to make many discoveries of the last few years commercial and increase domestic production.’ At the same time, the industry group pointed out that the government had not accepted all of the recommendations made by the Rangarajan Committee, notably the suggestion of considering the prices of both long-term LNG contracts as well as spot prices in the formula used to arrive at the domestic price of gas—the CCEA, as mentioned, had deleted spot rates from the formula approved. ‘Removal of spot prices from the formula reduces the volume and the correct reflection of imported LNG cost thus affecting domestic producer’s price,’ the AOGO argued in its statement.
The association pointed out that the government was ‘silent’ on the Rangarajan Committee’s recommendation to transit to free market prices within five years, which was being looked at by the Vijay Kelkar committee, with its report expected later. ‘AOGO strongly hopes that the transition to free market shall start within next year (2014),’ it stated, adding that future investors would ‘be willing to take the risk of lower prices, as long as the free market principles and non interference by allocation’ was maintained (see Rediff.com, 1 July 2013). The government seemed to have taken the lobby’s wishes to heart and had already started dismantling the administered pricing mechanism. Another EGoM headed by defence minister A. K. Antony would be considering a petroleum ministry proposal to abolish the priority ranking in natural gas allocation so that fuel currently consumed by urea plants could be ‘diverted’ to fuel-starved gas-based power plants. The group which subsequently met on 17 July decided to maintain the status quo.
Currently natural gas is first given to urea manufacturing fertiliser plants, then to LPG (liquefied petroleum gas or cooking gas) units, followed by power plants, city gas, steel and refineries. On the basis of this ranking, supplies to 25 power plants, which had signed for 29.74 mscmd of KG-D6 gas were cut on a pro-rata basis and thereafter, in 2013, completely stopped as gas production from KG-D6 touched a record low of 15 mscmd which was just about sufficient to meet the requirements of the fertiliser sector and some LPG plants, leaving no gas for power plants. The petroleum ministry had proposed two options: equal priority to all the core sectors—fertilisers, LPG, power and city gas distribution—or give the fertiliser and power sectors equal priority. The gas supplies would be redistributed among the sector users on a pro-rata basis ‘on the signed gas supply agreements’. If the available gas was to be redistributed among the four core sectors, it would reduce supplies to fertiliser plants by 9.44 mscmd and lead to an extra urea import of 4.73 million tonne, leading to an additional subsidy burden of about Rs 5,591 crore per annum. The ministry’s second option, equal priority to the power and fertiliser sectors would mean that gas supply to urea plants would go down by 9.07 mscmd forcing an import of 4.54 million tonne of urea implying an additional subsidy burden of Rs 5,372 crore per annum. Either way, it was a ‘lose-lose’ situation. For the Indian farmer in particular, it was a mug’s game. There was no way he could hope to gain.
As a rather belated editorial in the Times of India (2 July 2013) noted:
The fertiliser industry, which is heavily subsidised by the government and has little ability to absorb costlier gas, will have no option but to pass off the price increase directly to the farmers and push up food prices or else have taxpayers bear the additional subsidy burden. Despite implementing the New Exploration and Licensing Policy (NELP) for almost a decade and a half almost none of the global oil majors, who have the wherewithal to locate and tap large new finds, have shown any interest.
In a scathing criticism of the UPA government, the editorial indicted it for ‘stoking inflation as well as supporting crony capitalism’. It opined that the major reason for the absence of global players in India’s gas market was the ‘absence of a stable and transparent framework in the energy sector’, with policies being ‘often tailored to suit favoured players’. The editorial said that there was a tendency ‘to micromanage the industry’ and recalled that ‘efforts to
encourage new suppliers by laying domestic and trans-border pipelines’ and increasing competition had not been very successful.
The government chose to brazen it out. Stoutly defending the hike in gas prices, petroleum minister Moily said the move would benefit the government in terms of revenue as many gas discoveries have been made by public sector companies rather than those in the private sector. ‘I think as much as 90 per cent of gas discoveries have been made by the public sector companies and remaining 10 per cent by private companies. Hence, 80 per cent of the income or profit from these explorations will come back to the government as revenue,’ he claimed (PTI, 3 July 2013).
Moily claimed that private companies were producing barely five per cent of the total gas consumed in the country and there was no question of anybody earning windfall profits, apparently referring to Reliance. The minister said the money earned by the country will have to be preserved and reinvested, instead of ‘draining it’ to other countries. In the last six years, the US and China have been producing 40–50 per cent more gas because foreign investments were flowing into their countries, Moily said, adding: ‘Whereas our country is going back (nowhere). It doesn’t stand any logic, neither economic nor national.’ He added that several gas discoveries by ONGC and RIL had been declared unviable by the directorate general of hydrocarbons as the gas price of $4.2 per mBtu current was ‘inadequate to cover the cost’. Moily said the country ‘cannot survive’ by continuing to import Rs 800,000 crore worth of petroleum products and rued that the country is not in a position to explore oil and gas, because of lack of interest by investors. ‘As a minister I cannot preside over a sick ministry. I would like to take it forward so that the country secures independence in energy sector. We need to attain it and it is possible to do that,’ he said.
Moily was on overdrive justifying the government’s decision to increase the price of gas. The following day, 6 July, the petroleum ministry issued a statement putting out another set of statistics. It categorically said Reliance Industries would not be the recipient of ‘windfall gains’ as new gas production from the company’s fields would not start before 2017–18. He said RIL was accounting for only ten per cent of the total domestic gas production in the country (against five per cent of total gas consumption). ‘With the new price, it is expected that their (meaning RIL’s) production from KG-D6 will increase with the additional investment,’ the ministry’s statement read, adding that the higher price ‘will help monetise discoveries which are not viable at current rates’. ‘However, the gas flow (from the new fields) is not likely to start before 2017–18 and therefore, allegation of any windfall gain is misconceived,’ the statement claimed, adding that more than two-thirds of India’s domestic gas production is by public sector firms which stand to gain the most from the price hike. (Interestingly, a few days later on 9 July, the finance ministry wrote a letter to the petroleum ministry in which it was claimed that Reliance ‘will benefit the most from higher prices’.)
‘These guidelines shall apply from April 1, 2014 and shall be applicable for five years after which market discovery price could be adopted as per the road map being prepared by (the) Dr (Vijay) Kelkar committee,’ the ministry stated, adding that as per the Rangarajan formula, the price for natural gas in April–June 2013 worked out to $6.83 per mBtu but did not indicate the likely price of gas in April 2014. RIL’s minority partner, Niko Resources in a statement said $8.4 per mBtu would be the price in April 2014 and would thereafter be revised every quarter. The petroleum ministry stated that during the course of circulating the Cabinet note on revising gas prices, the Planning Commission had suggested a price of $11.18 per mBtu, the finance ministry had suggested a range between $6.99 and $8.93 per mBtu, the department of fertilisers had suggested $6.68 per mBtu while the ministry of power had opined that the $4.2 per mBtu figure should be stuck to. ‘However, the price of $4.2 (per mBtu) is not found to be viable for sustenance of the domestic production of gas and all the operators are demanding increase in price,’ the petroleum ministry stated.
Gujarat State Petroleum Corporation (GSPC) owned by the government of Gujarat had been demanding a price of between $13 and $14 per unit for gas produced from its block in the KG basin, it was stated. ‘Even the PSUs like ONGC and Oil India Ltd have been repeatedly representing for (an) increase in gas price as the production will not be viable at any price less than $7,’ the ministry contended, pointing out that domestic gas production in the country had been falling drastically short of the demand and the present deficit of 142.78 mscmd is expected to increase to around 234.26 mscmd in 2016–17. ‘Therefore, there will be huge dependence on the import of gas at much higher price of around $14 per mBtu and above, which will simply become unaffordable for consuming sector,’ the ministry stated. It added that investment in exploration and development of gas fields has consistently fallen from $6 billion in 2007–8 to around $1.8 billion in 2011–12. At the same time, Indian companies had already invested $27 billion on exploration and production of gas and oil outside India and investments of another $10 billion were in the pipeline. ‘It is important to note that every $1 per mBtu increase in the gas price would result in an additional burden of approximately $1 billion. However, half of it, that is, around $500 million will come back to the government in the form of royalty, profit, petroleum taxes and dividend,’ the petroleum ministry stated, claiming the ‘additional income’ could take care of the burden of higher subsidies on fertilisers and LPG.
By this time, India’s gas pricing story had gone global. As a Reuters report said on 6 July: ‘India is betting a gas price hike will boost supply and help fix the country’s chronic power shortages, but the plan may falter unless the debt-laden industry can pass on higher energy costs to consumers or win government subsidies’. The report pointed out that the move to increase the price of gas followed similar steps to hike coal prices in an ‘effort to reform India’s troubled power sector’, adding:
Massive blackouts in Asia’s third-biggest economy have hampered growth, which is at a decade-low. A third of the 1.2 billion population has no access to electricity. India wants to double the proportion of gas in its energy mix by 2020 from 10 per cent now. It uses coal for nearly 56 per cent of its needs. Oil, mostly imported, accounts for 26 per cent.
But the success of the latest plan lies in determining who will pay. Generators and distributors remain mired in debt and passing on politically unpopular electricity prices will prove difficult, particularly in an election year. The price hike is a win for producers, such as privately owned Reliance Industries which operates one of India’s biggest gas fields with international partner BP in the KG basin, where production has declined sharply.
The Reuters report quoted OIL chairman S.K. Srivastava describing the gas price hike as a ‘very positive and encouraging decision which will really incentivise oil and gas companies to pursue exploration activities’. It argued that better gas supplies should help power companies, pointing out that gas fuels only around seven per cent of India’s power stations, but many plants lie idle or operate at low capacity because there is not enough fuel available to keep their turbines running. The report highlighted the case of Lanco Infratech, ‘a power producer mired in losses and debt because its plants are running at a fraction of their capacity, has cut operations at one 366 MW unit to just four per cent of capacity for lack of gas’. While conceding that it ‘may take at least two years to boost fuel supplies as investments in output and import facilities bear fruit’, the report stated that the ‘key to the plan may lie with cash-strapped distribution companies’ or state-owned distributors called ‘discoms’ which have no funds to purchase more expensive electricity from gas-based power stations and were reluctant to pass on the higher costs to consumers since it would be politically unpopular. What the discoms often did instead was simply stop power supply.
Power utilities are rationing electricity supplies to consumers in an effort to improve their finances to qualify for a $32-billio
n government bailout package that aims to address massive losses racked up through years of corruption, populist pricing policies and mismanagement, the Reuters report stated. It quoted Vinayak Chatterjee, head of Feedback Infra Consultants, saying that in order to balance their books of account, eight-hour stoppages of power per day could even double as the discoms try to rein in their losses. ‘The discoms don’t have enough money to buy the power, therefore they are resorting to power cuts,’ added T. Adibabu, chief operating officer of Lanco. ‘Unless the discoms’ financial health is improved, the power situation cannot improve suddenly,’ he told Reuters.
The Economist (6 July 2013) wrote that one of India’s ‘big strategic worries is energy security’. India imports over 80 per cent of its crude oil. The country has lots of coal ‘but struggles to dig it up, mainly because of the state mining monopoly’s ineptitude’. ‘Gas is in demand but too little is pumped: by 2016 two-fifths of India’s supply is likely to come from expensive imports of liquefied natural gas (LNG)’, the UK-based weekly stated, adding: ‘All this leaves India exposed to supply interruptions in the Middle East and elsewhere, and strains its balance of payments’. It pointed out that over the last 15 years, India had invested $16 billion in oil and gas fields, which was less than half of what Brazil had spent and less than what India’s own energy companies had put into buying and developing fields abroad. India was ‘thought to have huge potential reserves of oil and gas’, perhaps the world’s fifteenth largest, according to the Boston Consulting Group. However, the Economist said only around one-fifth of likely hydrocarbon-bearing basins are classified as ‘well explored’. The conservative publication predictably endorsed the Indian government’s decision to increase the price of gas. While acknowledging the ‘explosive charge being made in some quarters is that the new regime is the result of cronyism and will allow well-connected production firms to profiteer from their existing assets’, the weekly claimed that this ‘seems hard to substantiate’. It doubted that Reliance would earn a ‘decent return’ on its investments and agreed with the petroleum ministry’s view that ‘any windfall profits (by state-owned firms would be) grabbed back by (the) government’.
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 35
