Mystery Around The Probable Gas Price Hike: In Whose Interest?

Posted on June 10, 2014 in Business and Economy

By Jhalak Agarwal:

The hike in gas prices may be just a speculation now but that doesn’t mean that it will always be that way. There has been a lot of controversy when it comes to the subject of gas pricing. If the Model code of conduct was not implemented, the price would have risen to USD 8 per million British thermal unit (mmBtu) as against the current USD 4.2/mmBtu. “The model code of conduct is a set of election rules that restricts government decisions that might unduly influence the country’s 815 million voters.” The Cabinet Committee of Economic Affairs (CCEA) has decided that the gas prices should be increased and that raises fear among the power producers as well as the fertilizer manufacturers who are the chief users. If the prices do rise, this will hugely favor the Reliance Industries.

If we talk about the way the prices are estimated, we find that the method is quite controversial. The Rangarajan panel recommended a base price that is arrived at by averaging the prices of imported gas by different users over a 12-month period and the prices that prevail in major international gas trading hubs. In an ideal world, India should not rely on the prices that prevail in international markets. This method is not fair either for the consumers or the domestic suppliers who provide natural gas. The estimation of the cost gets complicated because a part is sourced from the international markets and a part from the domestic users.

At present, India faces a very odd situation when it comes to the hydrocarbon sector. ONGC dominates in the public sector while RIL is the only company in the private sector. In such circumstances, we need to carefully evaluate, implement and regulate its management in order to avoid disproportionate gains for the producers. One of the ways in which equity as well as the efficiency issues can be addressed is when the government intervenes in the pricing decisions, but it always results into controversy instead because of the non-transparent and corrupt environment in which the decision making takes place.

It is still not certain if the prices should be increased or not. No one seems to know how the increased price was reached at. Even Veerappa Moily had no idea how the new price was decided. In an ideal situation, the pricing decisions should be broadly disseminated. Instead, it was left wide open for speculation. This situation is quite complicated. The KG-D6 basin is in the hands of RIL at present and the fact that RIL needs to raise the gas prices because of the circumstances invite suspicion.

Recently, the Comptroller and Auditor General has indicted that India’s largest private sector company, Reliance Industries Ltd has violated the terms of its contract for exploring the gas fields in the Krishna-Godavari Basin. If this were to be true, this would be the chief factor for the rise in the gas prices because such corruption in the assets of the country puts inflationary pressure on the price of the goods because of the extremely high rate of transportation as well as fuel.

When it comes to Modi’s agenda, his stand is that “he may review the formula on the lines suggested by a senior party leader last year and announce the date of implementation of new prices.” It is said that the Ministry will make a presentation on the issues pertaining to the gas and oil sector to the PM Narendra Modi and then it will give a clear direction on how to proceed on gas pricing. If the PM agrees to go according to the Rangarajan formula which was approved by the government in December last year, the announcement will be made forthwith.

Before its implementation, there are some changes that are required in the formula in order to protect the users in the fertilizers and the power sector. The Rangarajan Formula prices seek out to bring price clarity to support the E&P activity. They also seek out to remove the arbitrariness of prices as determined by the APM. Nevertheless, these prices may have an undetermined impact on the subsidy bill. “On the one hand, fuel subsidy may reduce, but on the other hand, the central government may end up spending more on fertilizer subsidies.” Also, RIL is seen with a suspicious eye as it is alleged that it has kept the production of KG-D6 block natural gas low over the past few years deliberately so that they would make a windfall when the prices rise and the production is increased.

With all these controversies flying around the corner, it is hard to know the truth and even the Supreme Court verdict asked the government to file an affidavit explaining why present gas prices in India are double than those in Bangladesh and why is the complex formula of Rangarajan necessary. At present, it seems that the hike will benefit only the RIL and will be highly against the domestic producers and the consumers.

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