Supreme Court verdict on coal block allotment: Should India strengthen the role of national miner?

Pratim Ranjan Bose

“The recent report by Comptroller and Auditor General has opened a can of worms on captive coal block allocation policy and ‘windfall gains’ to private sector companies. The auditor, however, kept dispensation of coal blocks to government companies — mostly owned by the State governments — out of the ambit of Coalgate,” I wrote in a post-edit in Business Line in September 2012, pointing out how the entire allocation to State sector went off-target.

I am happy that the Supreme Court took note of some of the issues and cancelled allotment of all 218 captive assets, disbursed either to the public or private sector, since 1994.  

Read the 163-page verdict - that gives a blow by blow account of the allotment process - and you will know how rules were flouted, changed indiscriminately at each and every step - so much so that in the end, during the Congress-led UPA rule (2004-2014), reserves were doled out, free of cost, without any set criteria.

The biggest scandal

It was arguably the biggest scandal that the Indian politics nurtured, and protected from public criticism, during the last two decades.

Take look at the history of the coalition politics and you will know that the entire cross section of Indian politics, has willy-nilly been a party to this shameful episode.

Every government that ruled in either the States or in Delhi–played a role in its making. If the Leftists in West Bengal were the first to lobby for allotment of blocks to private sector in 1994; the BJP-led government in Delhi between 1998 and 2004 (the current West Bengal Chief Minister Mamata Banerjee was a coal minister in NDA cabinet) didn’t take any step to correct the anomalies either.

A Communist party-led West Bengal government pioneered the controversial joint venture route for developing the coal assets allotted to the State sector. It helped crony capitalists pocket the benefits, meant for public good. All other states, including the rightist BJP-ruled Madhya Pradesh and Chhattisgarh adopted the model.  

If the Jhakhand Mukti Morcha (JMM) government in Ranchi thrived on coal block allocation; the largest political force Congress was a fountainhead of all illegalities (read corruption).

It was the P V Narsimha Rao-led Congress government (1991-1996) that paved way for captive block allotment in 1993. But, the Manmohan Singh government (2004-2014) took it to a new high.

It was during this period that every Tom, Dick and Harry of this country queued up for a coal block. And, those with the right connections ended up claiming a stake on the country’s most important energy source, Coal.

It’s a record of sorts that over 80 per cent of the captive blocks were distributed in merely five to six years between 2005 and 2010.

The apex Court now says, the entire exercise suffered from “the vice of arbitrariness”.

Anyone or everyone got a block by promising to set up a steel plant or electricity generation facility etc. Many of such allottees were not recommended either by the respective ministry (like steel or power) or the State governments. People even got assets without any recommendation at all.

If anyone, like P C Parakh, played a whistle blower; the Manmohan Singh government did its best to silence him.  

More decisions ahead

The Court has so far merely checked the legality of the allotments (a separate investigation is on to ascertain the financial impact and the alleged corruption in granting such assets) and, is yet to start hearing on the future of such blocks.

Most probably, there will be measures to regularise the ownership of 32 captive mines in operation and, some more assets in advanced stages of development, to safeguard any major impact on the economy.

Considering the total captive coal production of approximately 40 million tonnes a year (as against the nation’s annual coal consumption of over 650 mt); the impact, in any case, should not be significant.

A thumb-rule calculation suggests, even the closure of all such mines will impact only 8000 MW electricity generation capacities. That is a mere 3 per cent of the nation’s installed capacity.

However, it’s a major blow to the interest groups in industry and politics, who thrived on the illegal dispensation of such assets for nearly two decades. And, there are probabilities that they will put up a combined show to subvert the court initiative to bring the house in order.

More than the industry, it is the politics that should now suffer from an existential crisis. The order threatens their bargaining power with industry that is crucial to fund elections.

And, that raises questions about the future course of policy making regarding the all important coal sector in India.

Let CIL acquire the mines

There is little doubt that the apex Court verdict has opened a range of opportunities before the country to clean the entire energy space from the grip of crony capitalists.

Considering India’s low purchasing power and, high cost infrastructure the country cannot afford to pay a higher cost of electricity. And, to do that the grip of National Miner should be should be strengthened.

History taught us that the nation’s firm grip on energy sector is crucial for manufacturing growth.

India cannot keep private miners on as a tight lease as in one-party ruled China. So, there is little point in trying to emulate that model. It is better to introspect why a democratic South Korea has State monopoly on the electricity sector.

 If the Prime Minister Narendra Modi wants to make India a manufacturing hub; he must not let the country’s most important energy resource to slip into the hands of the ‘market’, at least not in this juncture of democracy, where the entire political system is running low on credibility.

The need of the hour is to work within the set paradigms of Coal Mines Nationalisation Act. Coal India (CIL) is flushed with cash. It can always acquire the captive mines and ensure that coal be supplied to the same end-use plants.

It should not trigger rise in electricity tariff or the competitiveness of the end-use plants, either. Because, captive miners are currently using mining operations as a profit centre, with fuel transferred to the end-use plant at CIL prices. 

On the brighter side, a rush in investments will improve CIL’s stock price, helping the government in making more money from the proposed stake-sell programme.

If necessary the Coal Mines Nationalisation Act may be slightly tweaked to allow CIL to enter 50:50 JVs with private sector.

The moot point India has to produce low-cost electricity to make its industry competitive.

Some Fears 

But the sceptics fear that the Indian politics may try to bounce back with a piece of legislation to take the steering in its hand. There are many examples of such retrospective policy making by the Indian Parliament in the past.

There may also be efforts to safeguard the sections of industry who are now caught on the wrong foot. Many already started demanding de-\nationalisation of the  coal sector.

The course of events in the next few months will prove, how India is shaping its future.

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(Disclaimer: Graphics are collected from web. Will be withdrawn in case of any objection)   

Time to free natural gas prices in India?

Pratim Ranjan Bose

The problem with Indian energy space is: it’s always driven by wrong agenda. The entire controversy on pricing of natural gas is a true representative of this phenomenon.

India is not powered by gas. It should not be. Because we have limited gas resources vis-à-vis world’s fourth largest reserves of cheapest fuel, coal.

A thumb rule comparison suggests that coal priced at $ 100 a tonne generates energy, equivalent to gas priced at $3.5 per mmBtu (million metric British thermal unit). In India the price of average thermal coal, used by the power sector, would not cross $ 21 a tonne (post-beneficiation).

At the current price of $ 4.2 per mmBtu, gas stands no chance even before the imported coal priced below $ 50 a tonne at Indian ports.

India is no exception. Coal has re-positioned itself as the most popular fuel for electricity generation cutting across continents.

In the emerging scenario, gas will play the second fiddle.

Wrong focus

Ideally, it was therefore time for India to solve the riddles in coal production that falls way behind the potential. But we decided the opposite.

While demand-supply gap of domestic coal went on increasing; the former UPA government (2004-2014) decided to double the well-head price of natural gas from $ 4.2 to nearly $ 8.4 per million metric British thermal unit (mmBtu), based on the Rangarajan formula, so as to attract more investments in oil and gas exploration.

The complex formula tried to establish a “theoretical” market price for domestic gas by linking it with the imported LNG on long term contracts; the weighted average of prices at trading hubs like Henry Hub in the US and National Balancing Point (NBP) in the UK and the cost of sourcing LNG for Japan.

Both the formula and the cabinet decision came at a time when the global gas prices (excepting in the US) were booming, riding on increased consumption by Japan and Korea following Fukushima disaster in March 2011.

Unviable prices

The new gas prices were scheduled for implementation from April 1. But, fortunately, it wasn’t.

The Narendra Modi government now wants to revise the prices to $ 6-6.5 a mmBtu.

The decision has caused heartburn to Indian producers. But there is little doubt that at $8.4 a mmBtu, India offered one of the highest (if not the highest) return to producers.

It is arguable if the shallow water and onshore gas, that forms lion’s share of Indian basket, is priced over $ 6 anywhere in the world. Even deepwater-gas from Brazil may be cheaper. 

True, some of the upcoming projects in Australia and Mozambique expected higher returns. But it is debatable if they will now find many takers.

Following strategic shift of Japan to coal, Asian LNG prices halved to $ 10 per mmBtu in July. Notwithstanding theUkraine crisis, gas priceshit 51 month low in the UK.

In the US where shale gas producers were complaining about low returns, prices did move from as low as $ 1.94 in April 2012 to $ 6.90 a mmBtu in February 2014. But, pressure from coal has quickly brought Henry Hub benchmark down to $ 3.87 per mmBtu (August 4).

The changing scenario has cast ashadow over some of the high cost LNG projects in Australia, where the manufacturing sector is demanding a cap on domestic gas prices.

The bottom line is: while India is contemplating 40-50 per cent hike in domestic gas prices, the world is moving in the other direction.

And, that triggers the obvious question: What is the correct gas price for the country? Should gas face more intense competition from coal in India?

Under state protection

Sadly, there is no easy answer to this question. Because, the Indian gas market is more protected than the nationalised coal sector.

In coal, the government has done away with the freight equalisation in 1991. It still allocates fuel. But that is largely to ensure supply of cheap fuel to the regulated electricity generation sector. The national miner, Coal India, has full authority on pricing.

Sectors like steel or cement that operate in open market purchase fuel at 40 per cent higher price than power. And, last but not the least, CIL is allowed to offload over one-tenth of its production to open market.

The reforms attracted industrial investments in coal-bearing states. CIL cannot make windfall profit from power sector that consumes 80 per cent of fuel. The realisation on the residual 20 per cent production can never be higher than the landed cost of imports.

Yet, the miner operates at 25 per cent net profit margin (2012-13).

Create free market of gas

The situation is diametrically opposite in gas.

Be it with or without Rangarajan: gas prices are a State domain. Every user is a beneficiary, as they are handpicked by the government.

And, that leaves sufficient scope to introspect, if its time for reforms in gas sector.

Government should have overreaching control over energy sector. It may create a framework for gas marketing, so as to attract investment in targeted user industries. It may also force the gas producers to sell a part of the production, at regulated price, to strategic sectors like fertiliser.

But, why should Delhi decide how much gas to be sold to which company and, in which State? 

Why should it take the fuel produced in the East coast to Jammu and Kashmir in the extreme North denying the prospects of industrialisation in Andhra Pradesh and Telengana, located right on the well-head?

Clearly, it’s the same economics that saw gas produced in Bombay High, on the West coast, travelling 1400 kms away to Delhi and UP.

It is inexplicable why a scarce resource that has alternative usages, be used in generating electricity in the National capital, when the coal-fired plants in the country are suffering from low capacity utilisation due to lukewarm demand. 

Remove the life-support and, the cost inefficiency of the gas economy will be clear as day light.

No amount of exploration could so far establish existence of large gas pool in India. All those dramatic projections on KG gas proved figment of imagination.

Then why fuel the public perception that the gas price hike is here to benefit oil companies?

Better, let gas producers fend for themselves within a broad framework. And, focus on clean coal technologies for long term solution.

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(Disclaimer: The graphics used with the blog are collected from web. They may be removed in case of any objection)

Asia and Europe's strategic shift to coal scripts end of the gas bubble

Pratim Ranjan Bose

The news has escaped the attention of Indian media that is generally a keen follower of the gas sector, having little or no significance in power generation!

On July 23, Japan issued a strong rebuttal to the US policy to discourage the developing world to set up coal-fired power stations, so as to fight global warming. 

Source: Japan Times

Backed by the environment lobby, the Barack Obama administration is trying to convince the developed world to stop funding in “overseas” coal-fired power stations. The US Export-Import Bank already adopted a policy in this regard in December 2013.

The move suits the US, as it would not clamp down on the country’s large pool of coal-based power stations - contributing 39 per cent of the electricity generated – but will put fresh hurdles before the emerging world in harnessing cheap energy sources.

According to The Wall Street Journal, Tokyo pointed out that the developing nations would have to use coal whether others liked it or not and the developed world should better facilitate use of efficient coal technologies to minimise carbon emission.

Fukushima and the gas bubble

The development coincided with Japan’s policy shift in favour of the ‘dirty-energy’.

In April this year, the Japanese cabinet declared coal and nuclear energy as important long-term electricity source. The aim was to safeguard the domestic economy from post-Fukushima volatility in natural gas prices. On July 23, an energy panel put its seal behind the strategy.

Once a coal-driven economy, Japan added significant natural gas (27.4 per cent) and oil-based (8.8 per cent) generation capacities, over the last few decades.

This coupled with nuclear (26 per cent), coal (27.4 per cent) and hydro electric (7.4 per cent), created a diversified electricity portfolio, Tokyo thought.  

But Fukushima Daiichi disaster in March 2011 had upset the calculation. 

Following the accident Japan phased out the nuclear facilities. The gap was filled by imported liquefied natural gas or LNG.

Gas producers across the world saw opportunity. Australia – the largest natural gas exporter to Japan - announced huge investments in liquefaction to produce world’s costliest LNG expected in 2018.

From approximately $ 10-11 per mmBtu (million metric British thermal unit) in early 2011, the spot-LNG prices in Japan nearly doubled to approximately $ 19-20 per mmBtu in January-February 2014.

This was nearly double the highest price paid by any European nation for natural gas and five-times the average price in USA. 

Japan was most affected. But the ripple effect was felt, in many ways than one, by every nation dependent on imports to meet the energy demand.

Russia, that meets nearly one-third of European demand, didn’t lose the opportunity to escalate natural gas prices and exert political pressure on EU.

In India gas producers are expecting double or triple the price (GSPC demanded $ 13/ mmBtu for KG offshore gas and, ONGC expect $ 12/mmbtu for Mahanadi offshore). Mozambique is developing a large LNG project to capitalise on the opportunity.

Strikingly gas price was firming up while price of other energy commodities especially coal remained soft, due to economic slowdown. 

The bubble is now about to burst.

In January this year, Japan – the world’s third largest energy consuming nation – imported 12 per cent more coal.

South Korea too decided to step up share of coal (44 per cent) in electricity generation and is setting up more plants 

The changing consumption pattern started reflecting on Asian LNG prices.

From as high as $ 20 a mmBtu in February this year; natural gas is now imported in Japan at a little over $ 10 per mmBtu - the lowest in last three years. 

Coal is king

The love for coal is more evident in Europe which is now trying to revive its economic fortune riding on cheap energy sources. 

Gone are the days when it took a high moral position on environment issues. European countries are replacing the costly gas-based power by cheaper coal-fired electricity. 

According to a Bloomberg report, Germany and UK - the two biggest proponents of clean energy and carbon emission norms – increased coal consumption by 13 and 22 per cent respectively in last four years.

Europe’s strongest economy, Germany, is also the continent’s largest consumer of ‘dirty-energy’. Poland, the fastest growing economy of the former Soviet block, however, doesn’t suffer from dual standards and is pushing coal as the energy of the future and an effective strategic tool to counter Russia’s energy threats. 

The changing energy-use pattern, made green lobbies apprehensive about the future of EU air pollution rules that promises to close down most of the coal-fired plants by 2020. One such analysis by Sandbag, an environment protection group, indicates Europe’s love affair with coal is likely to continue. 

The politics of energy

The most interesting shift took place in the US, in 2013.

A mere $ 1 per mmBtu increase in gas (mostly shale gas) prices saw share of coal in electricity generation moving up from 37 per cent (2012) to 39 per cent. Gas came a distant second at 27 per cent. Renewable sources (excluding hydro electricity) accounted for a mere 6 per cent of the total basket. 

The US is probably one of the most price sensitive (if not inefficient too) energy markets in the world.

The country shells out huge indirect subsidies (by sacrificing taxes) to keep petrol prices low - so much so that an average American spends a mere 2.5 per cent of the daily income in buying a gallon of petrol (gasoline). 

The price sensitivity is also evident in electricity generation. Till about 2008, the US was generating nearly half of its electricity from coal, because it was the cheapest locally available energy source.

The situation changed with shale gas revolution. With rising domestic production and falling gas prices, the share of coal in power generation started declining rapidly from 2009.

The switchover has hit a roadblock recently due to lower than anticipated growth in Shale gas production. And, according to the latest US Energy Information Administration (EIA) report, it will take another two decades for the share of gas to equal coal (34 per cent each in 2035).

Yet, there is little doubt that shale gas added both depth and diversity in the American energy basket. The US wants to build on this advantage and revive the manufacturing sector that had left for Asia over the last one and half decades.

But, the changing energy use pattern of the world may upset its game plan.

Fall in LNG prices should offer wider energy options to the large coal economies of India (72 per cent) and China (80 per cent).

Japan and Korea which had already taken over the American auto market may become more competitive with access to cheaper energy sources. And, the anaemic Europe will not miss this opportunity to ensure energy security.

Naturally, Obama’s move move against coal fired power stations did not find much support in Europe. Of the top 10 EU economies only Sweden, stood by the American President. Others wanted him to share the benefits of shale gas revolution in USA.

Obama reportedly advised Europe to develop its own energy. “You cannot just relyon other people's energy,” he said. 

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