Of fixing price for natural gas

  • 14/07/2007

On the face, it seems like a fight between brothers. One brother, in this case the elder, Mukesh Ambani, managed to get control over the country's gas reserves. The other, Anil Ambani, inherited the power generation business. When they were in it together, it worked brilliantly, the gas, priced low, would make it to the power plant, which in turn would yield rich dividends.

But now, the brother with the gas has reneged. The Union ministry of petroleum and natural gas is his mediator. Mukesh Ambani wants to price gas "at market rates". The ministry is willing to play ball. It says it wants "transparent and competitive bidding" to determine the price of domestically drilled natural gas. But as there is no competition - natural gas being in the hands of one big private player, Reliance Industries - this means next to nothing. Or it means a lot, if you are Reliance and are free to dictate the price.

But there is much more to this story than a family soap. Natural gas is crucial to the country's energy security. Gas-based power stations are easy to install, with low emissions. When compressed, gas can drive vehicles - as in Delhi. With investment in public transport, gas can reduce air pollution substantially in cities. So the price of this gas must not be a family affair. It is our affair.

Worldwide, the price of natural gas is not determined through demand and supply. Also unlike oil products, there is no cost in manufacturing gas. Beyond the capital costs of drilling, the cost of extracting gas is minimal. There are no refining costs. The only cost involves pumping and piping. Pipeline costs are amortised over years of operation.

Given this situation, countries choose from three strategies to fix prices. They can decide on long-term price agreements. For instance, Europe, which is dependent on Russian gas, fixes rates periodically. The other option is to link the price of gas to the basket of imported crude. If the average of different oil products goes up, the price of natural gas also increases - a floating price index. But this is an artificial construct because there is no market price.

The third option is to fix the price of natural gas at the rate of liquefied natural gas (lng), which is often more widely available, since it can be transported without pipelines. In the case of lng, the extra costs involve the costs of cooling and re-gasification. But as there is no 'market' price of natural gas, this is equally a construct, created on the basis of agreements. For lng to be the basis of the price of natural gas there needs to be substantial agreements on gas imports. Currently, we have one or, at most, two. There is no market to work with.

India has, till date, had an "administered" price regime, which marketwallahs are allergic to. In this system, as far as prices go, the government has differentiated between users - priority sectors like power and fertilisers, small users and users of cng in transport, and others like petrochemicals and industry. The price of transporting gas has also been fixed through the state-owned gas company, gail. In this way, the gas price remains competitive against its replacement, coal, in the case of power stations, petrol and diesel, in the case of transport and naphtha, in the case of industry. It worked well, until the government handed over gas reserves to one private company. Now, without competition and without markets to operate within, the company will have a field day.

I know this because I have been carefully watching the developments to bring cng to cities. In Delhi, because the market was mandated by the Supreme Court, through its order that all public transport vehicles should transit to gas, the price was also controlled on a cost-plus basis. In 2002, the then Union minister of petroleum and natural gas was dead against the introduction of cng in Delhi. He wanted diesel to continue. When all ploys to mislead the court failed, he simply raised the price of gas. The court asked us to examine if the price rise was justified. When we looked at the balance sheet of the company, it became clear that because the market was not developed (and never could be) the price, if not regulated through a formula, could lead to windfall profits. We asked that the price should be set so that costs were recovered and profits were secured, but that profits should not be excessive. As a result, Delhi's gas company, Indraprastha Gas Limited (igl), has been making profits but prices of gas have not increased substantially.

As cng was being introduced in other cities, we also wanted a policy directive on its availability and price, which would encourage its use as an environmentally acceptable fuel. This was not done. A pricing policy was made. But by then private players had entered the lucrative market and it was in their interest to keep things unregulated. The policy wasn't finalised. In city after city - Ahmedabad, Gurgaon, Noida, Lucknow - the programme has faltered because the private company, which by now has arm-twisted state governments to secure rights to distribute gas, has dictated the price.

We know air pollution is choking our cities. But they also need electricity. The option is to build coal-based power stations to supply this need. But even with the best of technology (which we don't have) for so-called clean coal, air and solid waste emissions are high. Gas would be an ideal option for these cities. But if the price of gas is determined based on non-existent market rates, then there is no way it can c

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