Gas & hot air

The Supreme Court had to step into another policy area — gas pricing — and directing the government to come out with a clear policy. Due to the Assembly elections in some states, the government of India will submit it to the Supreme Court on November 15, and thus close the uncertainty over a long-delayed decision. But what will happen is still a million-dollar question.

Amid a raging debate, the former government approved a gas pricing policy that was to come into effect from April 1, 2014. It had proposed doubling the gas price from $4.2 to $8.4/million British thermal units (mnBtu), but the Election Commission deferred its implementation as the model code of conduct during the general election became operative. The new government, on taking office, called for more deliberations on the issue in the public interest, thereby reviving the debate with polarising views.

The reasons for the debate are well-founded as the issue concerns both energy and food security. The power and fertiliser sectors alone account for about 70 per cent of total gas consumption and any increase in the price of gas would have consequent price effects on both. Gas-fired power plants are under-utilised due to stagnating domestic gas production on the one hand and import of gas is adversely impacting the balance of trade on the other. Gas has been cited as the fuel for the 21st century (with much lower greenhouse gas emissions, compared to other fossil fuels) much as oil was the fuel of the 20th century, and the fact that gas reserves are likely to outlive petroleum supplies.

However, there are no reliable forecasts of gas availability in India, unlike the extremely good geological prospects in some countries such as Saudi Arabia. Infra-structure such as gas pipelines, LNG terminals, cryogenic ships, etc. is underdeveloped. Marginal and deep sea exploration needs high-risk capital, necessi-tating huge investments. Above all, the government is wary of a public outcry that may result from any price increase, including crony capitalism.

Starting with the Ashok Chawla Committee Report on Allocation of Natural Resources, the Rangarajan Committee and now the Kelkar Committee, and coupled with international ex-perience, the common thread is the necessity to move towards market-determined pricing. The challenge before the government lies in a smooth transition to market prices. There is now an increasing focus on looking at the gas sector holistically and a realisation that choosing a model for gas pricing in isolation without looking at flanking issues is fraught with uncertainty.

The transition period needs to be made use of for capacity building and explaining the rationale to all stakeholders. Further, a competitive gas market needs to be ensured. The Chawla Committee and others have pointed out that a natural gas trading platform (exchan-ge) would allow pro-ducers to effect market discovery of gas prices and to sell gas competitively.

The development of an extensive network of overall infrastructure such as gas pipelines to connect gas demand and supply points needs to go hand-in-hand with the development of reliable gas availability forecasts. Given the high-risk costs associated with gas exploration, adequate infrastructure including technology and dependable forecasts would not only facilitate investment but also mitigate entry barriers when acc-ompanied by the removal of regulatory barriers.

At the same time, policies to develop additional sources of gas like shale, coal gasi-fication, etc. need to be put in place. In a matter of a few years, the gas deficit in the United States changed to surplus on account of the development of shale gas. It is reported that in India, shale deposits could be found in the Gangetic plains, Assam, Rajasthan and in some coastal areas. Efforts to build pipelines to bring gas from Turkmenistan, Iran, Qatar, etc. should be intensified and brought to a logical conclusion in a time-bound period.

The anticipation of increase in the prices of power and fertiliser and the public outcry which would follow in the movement towards a higher-priced regime in the natural gas sector is one of the main factors for debate and dilemma. Can natural gas pricing be based on the market but without calculating the effects on the power and fertiliser sectors? This brings in the entire issue of subsidies, which have increased from about nine per cent of the total Central government spending in 2004-05 to almost 14 per cent in the interim budget estimates for 2014-15.

The fertiliser subsidy alone has risen fourfold, to about Rs 68,000 crore. It is time to desist from the temptation to opt for soft options at the cost of ignoring pricing reforms. The interim period should be devoted to such capacity building that comprises a communication plan about costs and benefits of subsidies amongst all stakeholders. Surely, the newly-established Expenditure Reforms Commission headed by Bimal Jalan will have to contend with this conundrum. It is a tough decision, but one that must be taken — and the sooner the better.

In the meanwhile, a four-member Committee of Secretaries constituted last month to make amends to the formula notified in January 2014 has reportedly submitted its report on a new gas pricing mechanism. Though the contents of the report have been kept under wraps, it is hoped that the issues stated above have been considered. We need to wait until November 15 to know what it will be.

via Gas & hot air.