Gas price hike: Why it stinks
by Virendra Parekh on 03 Mar 2014 2 Comments

The proposed doubling of the indigenously produced natural gas price from April will hit everyone (except gas producers) hard. Since the move is mala fide, since it will cause the country an estimated loss of Rs. 54,500 crore every year, since it is an assault on the economic sovereignty of the country, since it will become effective at the fag end of this government’s tenure, this is a fit case for the Supreme Court or the Election Commission to intervene and ask the Central Government to put the decision on hold and leave it to the next government to deal with the issue.


If you thought you have seen the last of the UPA’s innumerable scandals, think again. One more, long in the making, is waiting to burst soon upon this hapless country. Its consequences will haunt us long after this government is gone and forgotten.


Prices of natural gas produced in the country are all set to be doubled (from $4.2 to $8.40 per million British thermal units) from April 1. This will lead to a rise in cost of electricity, fertilizers and transport. Even the poorest will not be able to escape its consequences. And the entire exercise is being carried out to fatten the coffers of India’s richest man Mukesh Ambani.


“The government took no action against the RIL for its deliberate drop in production and ignored the CAG report and the then Solicitor General’s opinion (in May 2012) and on the contrary accepted the RIL demand for doubling the gas prices from April 1 this year. This is a clear case of causing unimaginable loss to the government exchequer,” said a common complaint filed by former cabinet secretary TSR Subramanian, former Navy chief Admiral RH Tahiliani, eminent lawyer Kamini Jaiswal and former Union secretary EAS Sarma.


Based on this complaint, the Anti Corruption Branch (ACB) of the Delhi government has filed a criminal case under the Prevention of Corruption Act against Petroleum Minister M Veerappa Moily, former Petroleum Minister Murli Deora, Reliance Industries Limited, its chairman Mukesh Ambani and former DG Hydrocarbons VK Sibal for alleged collusion in the hike in prices of natural gas from KG basin.


However, M Veerappa Moily, that international authority on oil and gas, assures us that anyone who challenges the wisdom of this decision is an ignoramus. “We should sympathize with (Arvind) Kejriwal’s ignorance since he does not know how the government functions,” was the patronizing sneer of India’s Petroleum and Natural Gas Minister, whose government has justly earned the reputation of being the most corrupt administration since independence. He reiterated that the norms were being followed and there was a system for fixing prices. 


Moily’s ire was understandable. In filing an FIR against Central ministers and Mukesh Ambani for cheating, Delhi’s maverick former Chief Minister has shown the courage of the reckless as well as the shrewdness of a crafty politician.


The FIR has heavy political overtones and makes allegations that can never be proved (or disproved) in a court of law. It says that the decision to double gas prices is the “single biggest act of corruption done by the UPA government”. It alleges that Mani Shankar Aiyar and Jaipal Reddy were shunted out of the Oil Ministry to help Reliance Industries. The complaint says Aiyar had to go because he opposed RIL’s move to increase the cost of developing the controversial KG-D6 block, while Reddy paid the price for sending a stern show-cause notice to Reliance and penalising it for the drop in gas output despite higher expenditure in field development.


At one level, the substance of the complaint is something that is quite freely talked about all over the country. It is stale gossip in Delhi’s corridors of power that for years Reliance appointed and sacked Oil Ministers. Reliance Industries is not a success story abroad mainly because it cannot influence people overseas.


But filing an FIR which says that two Ministers were shown the door because of Reliance is a different matter altogether. How does one disprove the PMO’s contention that “No exogenous factor has any role to play in the appointment of ministers, and ministerial reshuffle and appointments are the sole prerogative of the PM?” Even the jurisdiction of a State Government to file an FIR on decisions taken by the Central Government may be questioned.


The FIR is, therefore, a political salvo aimed at bracketing the Congress and the BJP in an unholy alliance with Mukesh Ambani and his company. The Aam Aadmi Party (AAP) may be counted upon to increase its attacks on RIL and its alleged hoarding of natural resources and charging a bomb from the Indian people. AAP has realised that neither the Congress nor the BJP will go against Ambani and thinks this is the weak point of both parties. And AAP will make gas overpricing a big issue in the coming general elections.


Kejriwal has cleverly linked the FIR with the proposed doubling of the gas price which will hit everyone (except gas producers) hard. Since the move is mala fide, since it will cause the country an estimated loss of Rs. 54,500 crore every year, since it is an assault on the economic sovereignty of the country, since it will become effective at the fag end of the government’s tenure, he has asked the Central Government to put on hold the decision to hike price of gas and leave it to the next Government to deal with the issue.


He is on a firm ground here. When Moily claims that norms are being followed and there is a system for fixing prices, one is reminded of his illustrious former colleague in the Telecom Ministry, the one and only A Raja, who claimed he was following the policy of “First come, first served” in allocating telecom spectrum to operators, but went on changing the definition of “first come” until he got the answer he wanted.


Even a cursory perusal of the facts leaves no doubt that Ministers of the UPA colluded with Reliance to raise natural gas prices, leading to a windfall for the company at the cost of the common man. Reliance bagged the right to explore Krishna Godavari (KG) Basin for oil and gas through New Licensing and Exploration Policy (NELP) in the beginning of the millennium. The CAG report reveals how crony capitalism benefited RIL. The pre-qualification norms were diluted to ensure RIL qualified. There was no due diligence of the claimed size of gas discoveries, the field development plans and the investment outlays proposed. Above all, the company’s commitments under the PSC on gas output were not enforced.


In June 2004, National Thermal Power Corporation (NTPC) invited bids for supply of gas for its 2600 MW power plant in Kawas and Gandhar. Reliance Industries, hopeful of starting production of gas by the time NTPC’s power plant was ready, bid for the project offering to supply gas at a price of $2.34 per mmBtu for 17 years. It won the contract and a was issued a Letter of Intent (LoI) to supply 132 trillion units of gas per annum to NTPC for 17 years at a price of $2.34.


However, Reliance refused to sign the Gas Sale and Purchase Agreement agreed during the bidding process and sought major changes in the draft GSPA. NTPC dragged Reliance to Bombay High Court in December 2005. The case is still pending. The UPA government has never shown any urgency to pursue it and get justice to its own PSU.


In 2007, even as NTPC was fighting the case with Reliance in the Bombay High Court, the Government referred the matter to an Empowered Group of Ministers (EGoM). The EGoM, headed by Pranab Mukherjee (then the Finance Minister) nearly doubled the price to $4.2.  The figure was arrived at by using a formula devised by none other than Reliance itself! Reliance asked the gas user companies to quote a price between $4.54 and $4.75 per mmBtu. Reliance initially forwarded a figure of $4.59, which it later graciously brought down to $4.3, but Pranab Mukherjee claimed victory by announcing a figure of $4.2 per mmBtu.


Please notice that the price was hiked even before a single cubic meter of gas had been produced from the gas field. Serious objections to this craven display of crony capitalism were raised by TSR Subramanian, then the cabinet secretary and Surya P Sethi, then the Principal Adviser, Power and Energy, Government of India. They pointed out, inter alia, that the cost of production of natural gas was nowhere more than $1.43, that nowhere in the world the formula devised by Reliance was used, that the same Reliance had quoted a price of $2.34 for 17 years in a global tender just three years back. They were overruled, and a fake price discovery exercise was used to justify the higher price that a bogus formula had delivered.


Production of gas in the KG-D-6 gas field began in April 2009. However, it was not long before Reliance began to be dissatisfied even with the new price of $4.2. Production of gas in the KG D-6 started tumbling, hitting a level one-third of what was promised in the production sharing contract (PSC). Unable to see the sorry plight of its contractor, the UPA Government formed a new committee headed by C Rangarajan, former Governor of the Reserve Bank of India and now the chairman of Prime Minister’s Economic Advisory Council.


Not entirely unexpectedly, Dr. Rangarajan fashioned an even more bogus formula to deliver a doubling of gas price to $8.4. He used the average of two variables to arrive at the new gas price: the landed cost of imported LNG in India and the average of the US, Europe and Japanese hub prices. The new formula has already been notified and will come into effect from April 1.            


Mr. Surya Sethi has asked the Prime Minister in an open letter not to burden the nation with “Rangarajan Committee’s madness that will only benefit a select few”. The Rangarajan Committee’s formula is incapable of estimating wellhead price of conventional natural gas since none of its elements represents such a price. The Henry Hub spot price (currently at $6/MmBtu), is the only relevant element in the Rangarajan formula and even that is greater than the wellhead price received by producers of conventional dry natural gas in the US.


In fact, there is not a single gas field in the world that gets a well head price of $8.40/MmBtu for conventional dry natural gas. How come investments keep taking place elsewhere without resorting to such dubious pricing formulae? As Mr. Sethi points out, there is no natural gas market in India and even the global market is fragmented and non-fungible. A market, and hence a market price, can only exist when full fungibility is assured and multiple buyers and sellers compete freely under rules established by enlightened, independent and watchful regulators. This is not the case in India for gas or any competing energy source.


Mr. Sethi trashes the Indian natural gas producers’ demand for price parity with the landed cost of imported LNG, estimated at $15. He points out that the European natural gas producers do not get such parity even though LNG accounts for about 30 per cent of all European gas imports. Nor do American natural gas producers, even though America still imports some LNG.


Natural gas is regarded as the world’s cheapest and cleanest fuel. At one stroke, this government has rendered it an uneconomical proposition. For, who would set up a gas-fired power station at this price? Power company experts say that along with fixed capital cost, the effective cost of power at the new price for gas at the generating station before transmission and downstream costs would be about Rs. 5.50 per unit. That compares with about Rs 4.50 per unit for a power plant using imported coal. Power based on local coal would be much cheaper. In other words, it would no longer be economical to mine gas at this price.


Please remember that when Reliance quoted a price of $2.34 to NTPC in 2004 for 17 years, a dollar was worth Rs. 47. Now it gets $4.2 when the dollar costs Rs. 62. In other words, the price that Reliance gets for its gas has shot up from Rs. 110 to Rs. 260. And now it is proposed to be hiked to Rs. 520! Ask yourself why gas that is produced and consumed in India should be priced in dollar. Why impose exchange risk on consumers when no import or export is involved?


Please remember that production sharing contract has no provision for revising wellhead price of gas from fields already declared commercial. Doing so only shifts the contractor’s risk burden to gas consumers. Please also remember that while declaring natural gas (along with other minerals) a national wealth, the Supreme Court placed upon the government the responsibility for pricing and allocating natural resources. The government is poised to abdicate it by kow-towing the line laid down by Reliance.


For once, we tend to agree with Communist MP Gurudas Dasgupta that a “gigantic scam” is being perpetrated on the impoverished people of our country. Tragically, it is happening at a time when they need access to modern energy at affordable prices to work their way out of poverty. Perhaps this is a fit case for a public interest litigation seeking a directive from the Court to the Government asking it to refrain from going ahead with the price hike until the inquiry into the allegations of gas hoarding by Reliance is concluded.


Perhaps the Election Commission could view this as a conflict of interests as the effective date is April 1 and by then this Government will be under code of conduct and will not have the power to revise the gas price. Propriety demands this should be left to the next regime.

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