Speaking at the launch of nation”s maiden online gas trading platform by Indian Gas Exchange (IGX), union minister for petroleum and natural gas (MPNG), Dharmendra Pradhan reiterated the commitment of Modi –government to raise the share of natural gas in the energy basket from existing around 6% to 15% by 2030 in sync with its avowed objective of promoting use of environment friendly fuel.
Pradhan also alluded to ‘a new pipeline tariff policy that will replace existing practice of seven different pipeline operators charging separate rates and customers away from gas source paying more than those nearer to source’. The Chairman, Petroleum and Natural Gas Regulatory Board (PNGRB), Dinesh Kumar Sarraf was more specific when he hinted at ‘single rate across pipelines so as to make the price of fuel uniform for customers across the country’.
According to the minister, ‘the new policy will help bring down the cost of natural gas, make it affordable in every part of the country and facilitate development of gas market in eastern and north eastern part of the country’.
Currently, nearly 50% of India’s total natural gas requirement is imported as LNG (liquefied natural gas) which is re-gasified at re-gasification plants set up at major terminals viz. Hazira and Dahej (Gujarat), Kochi (Kerala) and transported through a network of pipelines to consuming areas (at present, about 16,788 km long gas pipeline network is under operation and around 14,500 km pipeline is approved/under construction).
The indigenous supplies (accounting for the balance 50%) mostly from western offshore fields after landing on the shore is also transported through the pipelines.
The cost of supplying gas to customers located near the source (such as those in Gujarat) is bound to be less than to customers who are located far away the hinterland. Accordingly, under the existing arrangement, customers located near the source pay less whereas others in the hinterland pay more. The government intends to replace this by ‘uniform’ tariff payable by all consumers.
The idea is flawed. There can only be two rational approaches for setting tariff. Either, determination of tariff is left entirely to the forces of demand and supply. But, this works only when the market is matured and there are plenty of supplies to match the demand. In Indian scenario, none of these conditions is met. The other basis is to use the cost plus principle; of course, such determination has to be based on certain norms such as the carrying capacity, volume of gas actually transported, permissible rate of return on investment etc.
While, this is the way to go, if the government wants to latch on to charging the same rate from all consumers, this will tantamount to consumers located near the source cross-subsidizing those who are located away. Decades ago, we had a system of freight equalization for steel something akin to what is being proposed now in case of natural gas. This was eventually abolished as this was neither considered fair nor rational.
The minister’s argument that this will help in lowering the cost of natural gas and make it affordable in every part of the country particularly in eastern and north eastern part of the country is also untenable. The change in methodology (read: ‘uniform’ tariff) does not result in real reduction in cost as it merely takes away money from consumers located near the source and give to those who are located away. Helping industries in east and north-east at the cost of units located in west is unfair and inequitable.
That apart, it would be anomalous to look at the cost of an input (in this case, natural gas) in isolation. For assessing the competitiveness of an industry, we need to look at the holistic picture and not just at one part. For instance, compare two urea manufacturing units, one located near the gas source and the other in the hinterland. While, the latter may be at a disadvantage when it comes to cost of gas (due to higher transportation tariff) but it has the advantage of being nearer the major consumption areas for the final product i.e. urea whereas the former is at a disadvantage in this respect.
In this backdrop, if a uniform transportation tariff is adopted, this will put the urea manufacturing unit located near the gas source at a net loss as it continues to suffer from higher cost of transporting the final product even as its low cost gas advantage is lost. On the other hand, the unit in the hinterland will have an edge as it continues to enjoy lower freight even as its higher cost gas handicap is removed.
All manufacturers of urea (about 25% of domestic gas is used for its production) are required to sell this fertilizer at the same maximum retail price (MRP) controlled by the government at a low level. The excess of the cost of production and distribution over MRP is reimbursed to them as subsidy on unit-specific basis. In this backdrop, even if a unit in the hinterland has to pay higher transportation tariff , this won’t have any adverse effect as the same gets compensated as higher subsidy.
Five years ago, the government had introduced a system of pooling domestic gas with re-gasified LNG (R-LNG) with a view to provide natural gas at ‘uniform’ delivered price to all urea manufacturing plants connected to the gas grid for the purpose of making urea. The Gas Authority of India (GAIL) – a public sector undertaking (PSU) that owns and operates most of the gas pipeline network – was designated as the pool operator for implementing the pooling mechanism which took effect from July 1, 2015.
Considering that the cost of imported R-LNG is generally higher than the price of domestic gas (most of the time, the former is twice that of the latter), taking the average of the two prices and making supplies from out of the pool (domestic plus R-LNG) to all grid connected urea manufacturers at the average price helps in lowering the cost to all. On the same logic, could the government be considering uniform transportation tariff for all consumers/manufacturers?
The two situations are not comparable. The gas pooling was forced by a peculiar circumstance. Since, the cheaper domestic gas caters to only about 60% of the total requirement (about 42 million standard cubic meters per day), manufacturers were vying to corner a maximum share. This led to an anomalous situation whereby some would get to meet all of their need from domestic gas even as others had to contend with R-LNG. Pooling of the two gas sources and delivering to all units at uniform price removed this anomaly.
When, it comes to transportation of gas, there is no room for discretion even as variation in the cost arises entirely due to factor of location of the consuming unit vis-à-vis the supply source.
Could it be that the government wants to remove control on fertilizers and give subsidy directly to farmers? In such a scenario, it is keen that manufacturers should be given a level playing field with respect to cost of main inputs which in this case is natural gas (of the 30 urea plants, 27 are based on gas). Hence, it is now proposing to fix uniform transportation tariff having already introduced uniform basic price through the mechanism of pooling.
The argument sounds appealing. But, on a close look, it turns out that the government is not serious about decontrol and direct transfer of subsidy to farmers. This reform is yet to see the light of the day despite being on its radar for close to a decade.
The most requirement for a level playing field is to have a uniform tax structure. But, this is missing. Natural gas is out of GST. Though, excise duty on gas is nil, VAT varies from state to state from as low as 5% in Rajasthan to a high of 21% in Uttar Pradesh. Besides, some states impose local levies; e.g. ‘purchase tax’ in Gujarat on that portion of gas used for making urea that is sold outside the state.
The government should not intervene in areas viz. gas pricing, transport tariff etc where it ought not. These areas should be left entirely to the market forces. It should deregulate import of LNG and hive off the infrastructure for handling and transportation from GAIL. This will help in development of competitive markets and lower the price to consumers. Besides, it will encourage energy companies invest in exploration and development of gas fields. Further, it should bring gas under GST and tax it @ 5%.