The anti-corruption branch (ACB) of Delhi Government – On Kejriwal’s behest – has filed FIR against Veerappa Moily et al for criminal conspiracy to double gas price to US$ 8.4 per mBtu (million British thermal unit) from April, 2014.
He opines this will give a windfall of Rs 54,000 crores annually to RIL which produces gas ‘allegedly’ at cost of US$ 1 per mBtu. However, Moily justifies saying ‘system of pricing is based on expert advice’. So, what system has government adopted?
RIL discovered gas in D 1&3 fields in KG basin in 2002. It was awarded these fields under NELP-I in 1999. Under production sharing contract (PSC), price was to be market determined keeping in mind ‘arms-length’ principle and required government’s approval.
In 2004, RIL quoted a price of US$ 2.34 per mBtu under a competitive bidding (CB) tender floated by NTPC and committed to supply gas at this price from D 1&3 to latter’s 2600 MW power plant in Kawas and Gandhar for a period of 17 years.
Meanwhile, in 2005, following split between Ambani brothers – RIL signed contract with RNRL (a firm owned by Anil Ambani) to supply gas at same price as applicable to NTPC. As required under PSC, RIL sought oil ministry’s approval for US$ 2.34 per mBtu.
That price was a win-win for all stakeholders. Besides fully protecting interest of producer, this would have kept cost of supplying power, fertilizers, CNG, PNG etc low. Government ought to have approved this price; yet, this was rejected!
It argued that arms-length principle was not followed. This was ostensibly on the basis that being a contract between two brothers, the price agreed to could not be considered to be arms-length. That was bizarre!
How could government resort to such a narrow interpretation on an issue that has huge national ramifications? How could it ignore that this very price was reached in an open and transparent manner under CB for supplies to NTPC?
On closer look, RIL cited its deal with RNRL for seeking approval. It also lost no time informing that ‘it can’t supply at NTPC rate’. Instead, it submitted a crude-linked formula; @US$ 60 per barrel, that yielded US$ 4.2 per mBtu.
In 2007, government promptly approved US$ 4.2 per mBtu chargeable for 5 years from date of production. This was also applied to supplies from ONGC/OIL mainly to fertilizers and power under administered price mechanism (APM).
Clearly, adoption of US$ 4.2 per mBtu – presented by RIL as an afterthought – was a blatant violation of market-based pricing as required under PSC.
Even Rangarajan formula (approved by Cabinet in June, 2013) is disingenuous as it is based on average prices of global benchmark at Henry hub (USA) and NBC (national balancing point), UK and producers net back from LNG supplies to India and Japan in preceding 6 months.
Due to tight global demand-supply balance and India’s heavy dependence on import, current LNG prices are exploitative. Net-back from its supplies to India and Japan is way above US$ 10 per mBtu as against around US$ 3.3 per mBtu at Henry hub.
Since, two sets are clubbed, formula leads to steep increase in price to US$ 8.4 per mBtu. True, domestic production needs to be incentivized. But, to argue this will come only by giving operators today’s extortion price is obnoxious.
Much of global trade in gas takes place at hub prices. These prices are reasonable and adequately protect supplier’s interest? On the other hand, price of imported LNG is an aberration and must not be included for determining producer’s price in India.
Team Moily opines ‘if US$ 8.4 per mBtu is not granted, domestic production will not increase and we would continue to import LNG at US$ 16 plus’. This is scaremongering. It is like telling a person to choose between life term and death sentence.
In June, 2013 meeting, fertilizer and power ministers had strongly opposed the steep hike. Later, Finance Minister promised to give concession to both sectors. Then, why increase price at all especially when these two use nearly 75% of gas?
Rangarajan formula based price is also out of sync with prevailing prices in other countries viz., US$ 2.6 per mBtu in Russia; US$ 3.3 per mBtu in USA and US$ 1.5 per mBtu in UAE.
Other principle is production cost plus reasonable return. Government follows this in fertilizers and power. Even for domestic gas supplies from ONGC/OIL, this was used for determining producer price as per Kelkar formula till 2007 but abandoned thereafter.
In August, 2013, Parliament’s standing committee asked government to re-consider its decision and examine cost of production. In this regard, a close look at some facts is in order.
Initially, oil ministry/DGH approved US$ 2.4 billion for 40 mmscmd. In 2007, this was hiked to US$ 8.8 billion for enhanced output 80 mmscmd. In 2011, this was reduced to US$ 5.6 billion.
1 mmscmd equals 10,000 million kcl. @ US$ 1 per mBtu or US$ 4 per mKcl (4 mBtu=1 mkcl), value of 1 mmscmd is US$ 40,000 or 0.04 million. This will yield US$ 14.6 million annually (.04×365). If, fields produce 80 mmscmd – as committed under PSC – total revenue would be US$ 1168 million (14.6×80).
Even assuming Kejriwal’s US$ 1 per mBtu, entire US$ 5.6 billion could be recovered in less than 5 years (5600/1168) (production commenced in 2009). Though, actual production was less than 80 mmscmd, outcome would be even better as price allowed was more than 4 times at US$ 4.2 per mBtu
In this backdrop, and entire investment already fully amortized, even if price is retained at US$ 4.2 per mBtu, operator would make handsome profits.
Clearly, structure of pricing that government wants to put in place from April, 2014 is flawed. It neither adopts market based principle nor follows global benchmark. And, it does not consider cost of production approach.
A viable pricing system must reconcile concerns of both producers and users. But, Rangarajan formula confers bonanza to former at expense of latter. Yet, there is no guarantee that India will get more gas as real constraints lie elsewhere!