The state-owned Oil and Natural Gas Corporation (ONGC) is forming a new wholly-owned subsidiary company with the objective of sourcing, marketing and trading of natural gas, liquefied natural gas (LNG) business, gas to power business and so on. The company is already into exploration and production of gas (besides crude oil) which it sells to a variety of users viz. fertilizers, power, chemicals and petrochemicals, CNG, gas for household consumption etc.
What has prompted it to set up a separate company solely for the purpose of trading and marketing of gas?
It is not a simple case of business restructuring; instead it is an attempt to circumvent control on price of gas imposed by the Union Government. To see how it seeks to do it, let us take a look at extant pricing structure.
Under the pricing guidelines effective from November 1, 2014, for all domestic supplies from fields given under the new exploration and licensing policy (NELP), as also blocks given on ‘nomination’ to ONGC and Oil India Limited (OIL) under pre-NELP, the price – call it normal price – is a weighted average of prices at four international locations in USA, the UK, Canada, and Russia. Revised every six months in a financial year, the current price, from October 1, 2020, is US$1.79 per million Btu (British thermal unit).
Under a special package for deep/ultra-deep, high-pressure/high-temperature (HP/HT) fields announced in March 2016, the supplies there from are allowed a market based price subject to a ceiling which is linked to the prices of alternate fuels, including fuel oil, naphtha and LNG. The current ceiling price is US$4.06 per million Btu. Known as the ‘premium’ price, the applicable price is arrived at based on competitive bidding – in which earlier, affiliates of gas producers were not allowed to participate. If, the discovered price exceeds the ceiling then, the buyer pays only the ceiling price.
From October 2020, the bar on participation of affiliates of the gas producing firm was removed. This means that the producer can buy its own gas (albeit through its affiliate) and sell to third parties at a higher rate thereby circumventing the ceiling price. Reliance Industries Ltd (RIL) which produces gas from KG-D6 field in the Krishna Godavari basin did precisely this. In an auction on February 5, 2021, offering 7.5 mmscmd (million standard cubic meter per day) of new gas from this field, its subsidiary Reliance O2C Limited bought 4.8 mmscmd at a price of US$ 4.06 per million Btu and sold it for US$ 6-7 per million Btu to GAIL India Limited , Shell etc.
ONGC wants to do a repeat of what Reliance has done by forming a wholly owned subsidiary which will buy any new gas coming from former’s deep/ultra-deep fields such as KG-D5 also in the KG basin (projected at about 15 mmscmd) and in turn, sell to firms such as Mangalore Refinery and Petrochemicals Ltd (MRPL) at a price much higher than US$ 4.06 per million Btu.
Being a company majority owned by the Union Government, any decision by the ONGC board could not have been taken without its prior approval. In other words, it is amenable to the gas producer breaking the ceiling (set by none other than the Centre itself) and sell at a higher market discovered price. Put simply, the Government’s initial decision to put a cap on the price gets nullified by its subsequent action of allowing an affiliate of the gas producer to bid.
The supplies from fields given under Open Acreage Licensing Policy (OALP) (introduced in July 2017) are already eligible for market-based pricing. This also applies to unconventional hydrocarbons such as shale gas, coal bed methane (CBM) from the fields awarded under NELP. Further, supplies from the so called marginal fields (a total of 149) previously with ONGC and OIL and recently auctioned to private entities also qualify for complete freedom of pricing.
Now, gas companies are building pressure on the Government to alter the mechanism of fixing even the normal price applicable to supplies from fields given under NELP and ‘nomination’ blocks to ONGC and OIL under pre-NELP. The Ministry of Petroleum and Natural Gas had agreed to look into this and even set up a committee. That was in October, 2020 when, an idea was mooted to fix a floor price linked to the Japan-Korea Marker (JKM) – a benchmark index used to determine LNG tariff in North Asia – with a discount. This would have yielded a floor of US$4 million Btu.
Put all pieces together, one gets a sense that gas firms will receive price on an escalating scale with a minimum of US$4 million Btu and maximum hitting any level depending on the demand – supply scenario. Is this what Modi – Government had planned for?
It may be worthwhile to go back to 2014 when, it had undertaken a de novo review of the gas pricing formula finalized by the then UPA – Government (January, 2014) which could not be implemented in view of impending general elections.
Then, Team Modi had categorically rejected market – based pricing arguing that domestic supply of gas being far short of demand, this would result in high price, which users, particularly fertilizer industry, power, and city gas—they account for nearly 3/4th of total gas use—can’t afford. In fertilizers, bulk of the gas is used for producing urea, whose maximum retail price (MRP) is controlled at a low level to make it affordable to farmers. The excess cost of supply is reimbursed as subsidy to manufacturers. If, gas is priced high, with MRP remaining unchanged, this will result in higher subsidy, which the government wants to avoid.
Likewise, states want to pay less on power subsidy even as they order a big slice of it to be supplied at low tariff – even free – to farmers and poor households, unrelated to cost.
These overarching considerations weighed heavily on the ruling dispensation when it decided to stick to price regulation. For the same reason, it exercises control over the allocation of gas. Of the total supply, 31% is given to power, 24% to fertilizers, and 22% is allotted for city gas. Since then, nothing has changed as to warrant a move towards market-based pricing. Neither has the government has done away with control on urea MRP nor do states have any plans to shed supply of free power to key constituents.
In this scenario, if the Government allows producers to charge what they want, one shudders to even think of where fertilizer and power subsidy bill will reach (every one dollar per million Btu hike in gas price increases urea subsidy by about Rs 4000 crore annually). To accommodate the rising subsidy, it may have to further loosen the already relaxed fiscal deficit trajectory, outlined by the Finance Minister on February 1, 2021 for the next 5 years (6.8% of GDP in 2021-22 gliding down to 4.5% in 2025-26)!
The Government needs to make a clear-cut choice. If, it feels that high gas price to producers is the only way to make them deliver more supplies then, it should remove all controls on fertilizers, power etc and let them adjust as per market forces. If, it can’t, then it should regulate gas price and strictly adhere to November, 2014 guidelines – annulling all subsequent modifications.