The Cabinet Committee on Economic Affairs [CCEA] has approved marketing and pricing freedom to contractors/producers of coal-bed methane [CBM] – or natural gas from coal seams – to sell it at arms length price in the domestic market.
To discover arms length price, a contractor has to follow a fully transparent and competitive bidding process from amongst users “with the objective that the best possible price is realized for the gas without any restrictive commercial practices”. In the event, he cannot identify any buyer, sale can be made to any of its affiliates.
Royalty and other dues to the government, however, shall be payable on the basis of Petroleum Planning & Analysis Cell (PPAC) notified prices or selling prices, whichever is higher.
The decision is in response to a scenario whereby producers viz. Reliance Industries [RIL] and Oil and Natural Gas Corp (ONGC) etc do not find CBM production to be viable under the existing pricing guidelines.
Of the 33 CBM bearing blocks [awarded so far in four auction rounds and on a nomination basis], gas is being produced from only 4 with a combined output of 1.17 million standard cubic metres per day [mmscmd]. As many as 18 blocks have either been relinquished or are in the process of being relinquished. The producers exude confidence that freedom of pricing and marketing under the new policy will reverse this trend and help quickly ramp up CBM gas production to targeted 5.77 mmscmd within a year.
Only a few months back, the government had allowed complete pricing, marketing and production freedom in respect of gas produced from small and marginal discovered oil and gas fields [a total of 67 earlier given to ONGC and OIL on nomination basis in 90s which they surrendered to the government]. The fields were recently auctioned to promising investors under a revenue sharing contract. This too was rationalized on the basis that under extant pricing dispensation, production from these won’t be viable.
Earlier, in March, 2016, the government had given an ‘incentive’ price for gas produced from deep water & ultra-deep water and high pressure–high temperature [HPHT] areas [e.g. KG-DWN-98/2 of ONGC] using a formula based on price of alternate fuels. That price worked out to almost double of the price determined under extant guidelines. W.e.f October 1, 2016 this was US$ 5.3 per million British thermal unit [mBtu] as against normal price of US$ 2.78 per mBtu.
So, what is so wrong with the existing formula which has prompted the government to grant differential policy dispensations for gas coming from different sources/fields? Or, is it simply a case of the Modi – dispensation being bullied by interest groups to somehow get away with price higher than under formula based pricing? Is such a vacillating approach sustainable?
Under the extant guidelines for pricing of domestic gas in vogue from November 1, 2014, the price is based on a weighted average of prices at 4 global locations viz., Henry Hub [USA], NBP [National Balancing Point] [UK], AGR [Alberta Gas Reference] [Canada] and Russian price for a full year three months prior to the effective date for revision. The price is revised bi-annually [once in 6 months].
This was based on recommendations of a committee of secretaries [CoS] [September, 2014] which rejected the competitive bidding route arguing that the market for gas in India is in a nascent stage and considering that the demand is far in excess of supply, this would lead to exploitation of consumers. On the other hand, linkage with prices at mentioned locations which also happen to be major international trading hubs would free pricing from such an aberration.
Moreover, the formula-driven pricing has the advantage of a ‘neutral’ stance between producers and consumers as well as among various producers/consumers. In a scenario of increasing price, E&P companies stand to gain though consumers lose whereas, under a decreasing price scenario, producers lose but consumers stand to gain. Within each class [read, producers or consumers], an efficient entity is capable of extracting the best under any scenario.
Such a dispensation provides a ‘stable’ and ‘conducive’ policy environment for E&P companies to take investment decisions based on their assessment of how the benchmark global prices will move. It is far better than an administered regime under which the price movement is left to whims and fancies of the political establishment which is also prone to lobbying [this indeed was the case prior to November 2014 even as the system came under dis-repute].
The clamor for market driven pricing now may sound attractive to producers as this will give them an opportunity to charge more than under formula based pricing. But, this will be seriously detrimental to users especially sensitive sectors like fertilizer and power who consume bulk of gas supplies and cannot afford to pay high price [their end users being poor farmers and households]. Any attempt to gain at the cost of major consumers will be counter-productive.
A caveat that the producer will need to go through a transparent and competitive bidding process to discover the so called ‘arms length price’ is of no help. This is because in a scenario of acute shortage of gas and the demand being much higher than supply, the bidding process will inevitably lead to an exploitative price. Even the alternative of import won’t be of any help as the infrastructure for handling at port, transportation and distribution is with a handful of PSUs.
The CoS was well aware of this when only 2 years ago, it rejected this approach and instead recommended a formula based pricing. Nothing has changed since then to warrant a re-look at the pricing methodology. In fact, the supply scenario has only worsened with several fields viz. KG-DWN-98/2 [ONGC], KG-DWN-98/3 [RIL], KG-OSN-2001/3 [GSPC] on Krishna Godavari basin off Andhra coast showing much lower reserves than the quantum initially estimated.
As regards price being inadequate, it must be understood in no ambiguous terms that in businesses such as oil and gas, an overriding determinant of viability is volumes. If, production is high then, even with low price, cash flow will be substantial. On the other hand, if, production is less [as is the case with all high profile discoveries of this century], then any price level howsoever, high will fail to ensure viability of the field.
The government should drive home this fundamental point to E&P companies and stick to extant formula based guidelines of November, 2014 which is robust enough to take good care of even difficult fields [normally, they are expected to yield high volumes which can more than offset high exploration and development cost]. This will be good for users as well whom producers can ill-afford to ignore.
The current drift away from extant guidelines in respect of deep water/HPHT, small and marginal fields and now for CBM gas is not a healthy sign. While, there is no guarantee that this will yield higher output, it will make Modi – government susceptible to the charge of moving away from policy driven state.
It should halt the drift before it is too late.