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Four disputes rock gas pricing in India
August, 30th 2007

While the producers would be well within rights to discover the best price for their output, regulators would need to oversee the contract procedure to discourage any monopolistic behaviour.

MR Deepak Mahurkar, Associate Director, PricewaterhouseCoopers

D. Murali
Goutam Ghosh

What is the future of gas in India? Bright, says Mr Deepak Mahurkar, Associate Director, PricewaterhouseCoopers. Natural gas as an energy resource is critical to the growth of the country, he adds. Gas reserves in India appear promising. Discoveries are located far from centres of demand, which calls for robust infrastructure. If Indias gas usage is to reach 20 per cent of primary energy consumption by year 2030, $340-400 billion investment will be needed in the gas sector, explains Mr Mahurkar in an email interaction with Business Line.

Mr Mahurkars nearly two decades of professional experience includes projecting fuel demands through econometric modelling, sustainability reporting by oil industry, industry advocacy for policy formulation for upstream blocks awards, gas market development analysis, petrochemical market assessment, regulatory advisory in petroleum sector, analysing LNG and gas availability and their price projections for power plants.

Gas regulation

Excerpts from the interview.

What is the current debate about gas pricing in India?

Prices of oil and natural gas have increased in the world market. And there seem to be four types of disputes. First, under the New Exploration Licensing Policy introduced in 1999, when blocks are awarded to companies for exploration investment, the producers who find gas are allowed to sell at market prices.

Because of the high demand and high global prices, gas producers in India such as RIL (Reliance Industries Ltd) and ONGC are able to get higher market prices but which are neither acceptable to nor affordable by some consumers. Hence the industries and government are debating if producers should be allowed to sell with high margins (mark-up) in a socially sensitive sector.

Second, Reliance ADAG and NTPC have claimed right over supplies from Reliance Industries (RILs) gas output from KG Basin. Since RIL is going ahead with contracting supplies with other consumers, Reliance ADAG and NTPC have approached the courts. Apparently the Government would not be able to take any decision on pricing or allocation, till the case is settled by the court. The delays in contracting gas supply, which is expected to be available from the middle of next year, are worrying producers as they are unable to ensure a return on billions of dollars invested in the gas ventures.

Third, to overcome the higher cost of tied-up sources of LNG, Petronet LNG has asked old consumers to pay more so that it can supply gas to the Dabhol power project at an affordable rate. Consumers have taken the issue to court seeking enforcement of terms contracted with the supplier.

Finally, in a separate development, States have allowed some investors to go ahead and develop pipeline networks in cities. Gas being a Central subject, the Union Government is objecting to such licences being granted to developers.

The adjudication of these four cases will influence Indias gas market development phase.

Would these events affect the interest of investors?

Upstream investments are attracted by reducing underground and above-the-ground risks for investors. Underground risks are reduced by providing data to investors for analysis of hydrocarbon prospects. Above-the-ground risks are reduced by making the business environment conducive to investments. These could include firm policies and plans for commercialising discoveries. In India, unfortunately, investments in Rajasthan and KG Basin are facing hurdles in commercialising the product despite the discovery of oil and gas. These hurdles could discourage investors from placing their stakes in India.

What is the role governments can play and can regulators provide any solution?

Venezuela and Russia are examples of governments nationalising resources. Although India is not in that league, stakeholders wonder if the Government, citing consumer interests, would renege on contractual commitments to investors of offering market-determined prices.

While the producers would be well within rights to discover the best price for their output, regulators would need to oversee the contract procedure to discourage any monopolistic behaviour. This is necessary in India because gas markets are regionalised and pipeline networks are far from competitive.

What is the effect of putting price caps on an important commodity like gas?

Pricing of energy products such as gas must reflect their economic value. The user must pay. Although capping the prices of products is expected to be in the interest of consumers, it has its adverse effects. Energy planners are happy that over the last 3-4 years, the worlds energy elasticity to GDP is dropping, a phenomenon true for many countries. High prices are leading to technological advancements resulting in efficiency. This desired trend would be missing in territories where consumers are not facing high global prices due to artificial caps, resulting in poor economic efficiency, trade and fiscal imbalances.

What then can the Government do for equitable distribution of resource?

Natural gas is a premium energy source and has much wider applications than any other hydrocarbon or fossil fuel product. The supply deficit is likely to exist. Resultantly those consumers who value the product most would be ready to pay more for the fuel. For needy consumers with low ability-to-pay, the Government has some options.

The Indian Production Sharing Contracts (PSCs) have provisions for supply by producers, free of cost, the Governments share of gas. The Government would be free to use this gas to meet the needs of low-ability-to-pay consumers. Should the Government share not suffice, it would need to subsidise the difference for such consumers.

Why then is the Government not relying on profit petroleum?

The profit-petroleum provision in PSC, which determines the Governments share of oil or gas, is the attraction of Production Sharing regimes both for investors and the Government. In India, the provisions have not reached any practical acceptability between investors and the Government. The volumes are determined by Investment Multiples and, hence, vary every year.

The Government, therefore, cannot plan and off-take sustained volumes of gas for a longer duration. Consequently, it has been accepting the share in cash rather than in kind, depriving itself of the opportunity to offer gas to socially critical sector.

The Governments desire to keep commitments to off-take at as low as one to five years is not in the interest of investors, since its consumers do not want to suffer shortages if the Government decides to opt for gas in kind. To come out of this situation, it needs to be assessed if the PSC terms can be reset for future contracts to overcome such issues.

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