Natural Gas pricing: Is Kejriwal barking up the wrong tree?

Then the question comes, why explore gas domestically, if it entails a cost higher than global exploration costs. Here the Ministry's logic is the huge outgo on foreign exchange (oil and natural gas is our number one .

 

By Sreekumar Raghavan

 
As some one who has been following the developments in natural gas sector from an 'arms length' and the number of columns written by people who are not really experts but mostly laymen using some logic to come to a conclusion, I wouldn't be surprised if you get the facts right on this issue. Most of us either end up on the side of Kejriwal or hardcore UPA supporters the oppoiste.

In fact Dr C Rangarajan, a distinguished economist and former Governor of Reserve Bank of India (RBI) who didn't have anything to do with natural gas or crude oil headed a committee under the Prime Minister's Economic Advisory Council (EAC) to study the problems related to pricing of natural gas in India.

The Oil and Natural Gas Ministry seems to have partially adopted the recommendations of the committee and also based on Comptroller and Auditor General (CAG) reports, has come out with a new pricing formula effective from April 1, 2014. But nowhere does it mention that prices would rise to $8 per MMBTU (million British Thermal Units). Instead it is based on a formula that averages the prices that producers in other regions of the world and exporting centres get on a quarterly basis and that value is used to arrive at the domestic gas price in India.

A notification of the Ministry of Petroleum and Natural Gas dated January 1, 2014 states that prices applicable for domestic gas producers will be calculated on the basis of following methodology:

- The netback price of all Indian imports at the wellhead of the exporting countries will be estimated. It will be a weighted average pf such netback of import prices at the wellheads represent the average global price for Indian LNG imports.

Secondly, weighted average of prices prevailing at trading points of transactions – i.e., the hubs or balancing points of the major global markets will be estimated. For this, (a) the hub price (at the Henry Hub) in the US (for North America), (b) the price at the National Balancing Point of the UK (for Europe), and (c) the netback wellhead price at the sources of supply for Japan will be taken as the average price for producers at their supply points across continents.

-Finally, the simple average of the prices arrived at through the aforementioned two methods will be determined as the price for domestically produced natural gas in India.

This is the formula: PAV = (PIAV = PWAV)/2.

As per this notification, there is no reason to assume that prices will double to $8 per MMBTU as the variables are international prices and they have usually moved in a narrow band with markets presently bullish on colder weather in USA and Europe.

The Rangarajan Committee and the Petroleum and Natural Gas Ministry have put forward some objectives behind this pricing formula.

1) India doesn't have a domestic price for natural gas as it is mostly imported. This applies to crude oil too.

2)If India needs to enable energy security there needs to incentivisation to domestically explore the sources of natural gas. Hence this pricing formula which Kejriwal and co says would push prices to $8 per MMBTU

3) There is a reasonable basis to assume that India's production cost would be higher compared to other nations which have reached an advance level of exploration and mining of natural resources.

Then the question comes, why explore gas domestically, if it entails a cost higher than global exploration costs. Here the Ministry's logic is the huge outgo on foreign exchange (oil and natural gas is our number one guzzler of foreign exchange and therefore a major contributor increasing Current Account Deficit, apart from gold).

There are several issues related to Production Sharing Contracts and royalty payments, cost recoveries under NELP contracts which is beyond the scope of this column. The saddest part is that energy experts haven't really commented on the issue so far.

 

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