Editorial: After all that gas

Oil minister Dharmendra Pradhan has done well to finally come up with a proposal that, according to

him, unlocks gas production worth over Rs 1.8 lakh crore over a period of 15 years by providing a much

higher gas price for difficult discoveries such as those in the deep seas—since these are discoveries that

have been made but were not commercialised due to uneconomic gas pricing, getting them to

production stage will be relatively quicker. The value, in fact, could be a lot higher since Pradhan has

only taken into account recoveries worth 6.75 tcf, and this does not include those of Reliance Industries

where final figures have not been arrived at as yet. What is unfortunate, of course, is that the

government wasted nearly two years in raising prices—under normal circumstances, that may not have

mattered, but with today’s oil outlook very cloudy, any new expenditure proposal will have to pass a

much higher bar than in the past, so some of the investment may not finally take place. When the BJP

came to power, perhaps due to the history of the telecom, coal and other scams, it was convinced the

Rangarajan formula for hiking gas prices was nothing but a way to reward Reliance—never mind that the

state-owned ONGC benefited more as it had much more gas production—and said it would come up

with its own formula which, for instance, removed high-cost gas supplies to Japan. Even at that time,

this newspaper argued (https://goo.gl/BwdpXL) that Japanese prices had a limited impact in the formula

and, in any case, if imports were taking place at $11-12 per mmBtu, it made perfect sense to pay $8.4 to

local firms. While the government refused to listen and, as a result, lost two valuable years where more

exploration/production could have taken place, the irony is the price it has come up with doesn’t look

too dissimilar to Rangarajan’s.

This, though, is still not market pricing since a price cap has been imposed—the lowest of fuel oil,

imported LNG or a basket of fuels will be taken as the cap. A cap at the lowest of three possible prices

means all serious bids will mostly be at the cap price in a situation of excess demand—and since price

bids can no longer be the differentiator in such a situation, the only way to transparently allocate gas

among bidders is to give a higher preference to those who offer to buy more. Since this will mean the

smaller users will have to buy more expensive imported gas, sooner rather than later, the government

will need to move to full-blown market pricing. The larger lesson, and not just in the oil and gas sector, is

that when artificial caps or barriers are put, this lowers production. In the gas sector, this was evident

when exploration came to a near halt over the last two years. In the case of Bt cotton seeds, market-

leader Monsanto has threatened to quit the market over the 70% cut in its royalty by a government

order earlier this week. In the case of telecom, the government has been arm-twisting firms into not

only paying exorbitant amounts for buying spectrum, but even in terms of paying penalties for call drops

and in trying to enforce very strict definitions of net neutrality that will eat into the revenue models of

telcos—over even the medium term, investment levels will suffer. This is not complicated economics, it

is simple maths. Amazingly, even now, an avowed traders’ party doesn’t get it fully.

NGS INDIA