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