SEARCH

Opinion » Lead

Updated: July 8, 2013 00:16 IST

A wrong turn on energy

Sudha Mahalingam
Comment (12)   ·   print   ·   T  T  

The Indian government’s decision to double natural gas prices from April 2014 ostensibly to incentivise domestic gas production may render nuclear power less uncompetitive, an outcome that is largely unappreciated, but perhaps not unintended. The steep hike in domestic gas price is bound to freeze, if not drive down the share of natural gas in India’s already skewed energy basket with its attendant implications for energy security. Disproportionately weighed down by coal, which now accounts for more than 85 per cent of actual power generation from all sources, India’s energy basket has little room for manoeuvre. While imported coal will certainly appear more viable now, its absorption will be hamstrung by bottlenecks in port and handling infrastructure. Certainly no new gas-based generation will come up and even existing Combined Cycle Gas Turbine (CCGT) plants are likely to remain stranded.

Nuclear energy

Since power abhors a vacuum (pun intended), nuclear power from imported reactors, hitherto lurking in the background might emerge from the shadows to stake its claim in India’s energy basket. After all, like our universe, the energy industry is also ruled by the laws of relativity! That should be good news for the United States, which, having pushed through the 123 Agreement in the teeth of opposition from its own domestic constituency, has been waiting in suspended animation to operationalise it for the benefit of its reactor manufacturers. No doubt, U.S. companies have to compete with worthy rivals like Areva of France for a slice of the Indian market, but at least the market may open up now.

The United Progressive Alliance government which considers the Indo-U.S. nuclear agreement its crowning glory, has been at great pains to fully operationalise it, ostensibly to enhance India’s energy security, but has not succeeded largely because of cost factors. Imported light water reactors are hugely expensive to build and necessitate continued reliance on increasingly expensive, imported, enriched uranium. All these translate to very high level power tariffs even with substantial latent and patent subsidies, a detail that has been drowned in the din over the safety and environmental aspects of nuclear power. That nuclear power from imported reactors would still be too steep for India and even a couple of imported reactors may set back our power sector by decades a la Enron, will be a problem for a future government to grapple with. For the moment, high gas prices would tend to persuade us that nuclear power from imported reactors is indeed the only way forward.

Pricing premise

As for gas pricing, the premise on which the guiding formula has been justified seems to be rather flimsy, a point that has already been made by Surya Sethi and others, but still bears repetition. First of all, an invidious distinction has been made between those recommendations that would be applied prospectively and those that would take effect during the currency of production sharing contracts already under implementation. Thus, tinkering with production sharing contract (PSC) terms to ensure that production costs are not unduly inflated by the contractor has been kept in abeyance to be applied to future PSCs while pricing decisions will apply to existing PSCs.

That Krishna-Godavari (KG) D-6 production costs have been gold-plated is a well-documented fact which has even drawn the especial attention of the Comptroller and Auditor General (CAG). The Rangarajan Committee report admits as much and concedes the need for putting in place a robust mechanism to check gold-plating of upstream costs. Yet, this key lacuna will remain unaddressed in the case of existing PSCs even as higher prices will bestow substantial and unwarranted benefits on the operators, as has already been pointed out by several eminent observers. In fact, there is little justification for so steep a hike in the price of gas from already discovered fields of Reliance Industries Limited (RIL) which were supposed to supply at least 80 million metric standard cubic meter per day (mmscmd) even at U.S. $4.20/mmbtu [million metric British thermal units], but produce less than a quarter of that quantity. Reliance even built a hugely expensive pipeline across the country to carry 80 mmscmd of its own production. This pipeline is now being subsidised by a few unfortunate users who consume the meagre volumes of gas it transports.

Exploration

The premise that higher prices will automatically and inevitably lead to higher exploration and production (E&P) and therefore, higher gas output, is not only flawed but even misleading. The Union Petroleum Minister prepares the ground, as it were, by claiming a few weeks ago that India is virtually floating on hydrocarbons. He makes out a case that it is only inadequate exploration that keeps our country dependent on imports. The preface to the Terms of Reference (ToR) to the Rangarajan Committee almost anticipates the recommendations: it waxes eloquent on the attractive prospects of the grossly under-explored sedimentary basins, and almost implies that only a well head price hike stands between the cornucopia of black gold and the investments needed to pour it out. The committee itself rises to the bait and uses convoluted logic to justify doubling of gas price, providing a fig leaf to the government to justify the hike.

First of all, at the stage of exploration, nobody knows whether the block is going to yield oil, gas or both or nothing at all. For oil, domestic producers have already been given Import Parity Price since 2002, that is international market price plus notional transportation charges and import duties, an unconscionable windfall. Oil and Natural Gas Corporation Limited (ONGC), which found itself eking out a cost-plus price for its production, suddenly became the beneficiary of this windfall although some of it is sponged back by the government in the form of subsidy-sharing. Yet, ONGC’s domestic crude production has remained static in the last 10 years. Instead of looking for domestic crude which it can now sell at very attractive prices to domestic refiners, the company has taken the easier and more glamorous way out — of acquiring assets abroad, frequently of dubious quality — which compare poorly with domestic discoveries from the perspective of energy security.

Nor has this import parity price for crude produced in the country attracted international investors of established technological and financial muscle to put their money into a land (and territorial waters) supposed to be floating on hydrocarbons. After nine rounds of a New Exploration Licensing Policy (NELP) in which more than 200 blocks were awarded to investors through a transparent bidding mechanism, we do not have a single global oil major participating in our upstream exploration efforts, the generous terms of our PSCs notwithstanding. As has been pointed out, BP preferred to buy into an existing discovered block rather than venture into greenfield areas of doubtful prospects. Cairn, the only other major player in India, is not in the same league as BP or the other big majors.

Pipe dream

Now we have come to the conclusion that it is the low well head price of gas that is hindering investors and hence have remedied the situation by giving them a well head price that would probably be the highest anywhere in the world. Of all the multifarious gas price indices in the world, the Rangarajan Committee picks the steepest, namely, netback price of Liquefied natural gas (LNG) for its guiding formula, ostensibly to mimic gas markets until gas to gas competition emerges in five years time. We all know that there is no single unified global gas market, and that everywhere, gas prices tend to follow whim rather than reason. Gas to gas competition, that too in five years as the committee predicts sanguinely, is surely a pipe dream, pun intended.

What then is the justification for benchmarking domestic gas to the most expensive LNG index? If we go strictly by market forces, every fuel will tend to be priced at a level that aligns it with its closest substitute in its own market. Gas has more in common with coal which it seeks to displace, especially in power generation. Why then is it indexed to crude whose use is mainly in transportation and industry? Why do we have to reckon with Japanese Crude Cocktail (JCC), the most expensive crude cocktail in the world adopted by a desperate country with no domestic energy resource of its own, when pricing our own domestic gas?

The government’s decision on gas pricing will end up stymying, rather than developing domestic gas markets. For, high gas prices will result in demand destruction. Worse, they could end up stymying the development of the economy itself, already hamstrung by energy insecurity. Kumar Mangalam Birla has stated that the steep hike in gas prices is going to hurt domestic manufacturing which might well move out to other countries where fuel is more affordable, taking away jobs and livelihoods in the process. The price hike flies squarely in the face of the Supreme Court’s unequivocal and unambiguous ruling that natural resources are a public asset held in trusteeship by the government to be used for the benefit of the people.

(Sudha Mahalingam is an independent energy analyst and formerly, Member, Petroleum and Natural Gas Regulatory Board. E-mail: mahalingamsudha@gmail.com)

More In: Lead | Opinion

Before raising prices government should also concern about other measures to aware citizens, utilization of resources , environmental friendly programmes .
perhaps resource may depleting so govt need to go with environment not with crucial measures.

Next 100 years Devastation.
Next 10000 years Civilization...

from:  Hanumesh
Posted on: Jul 8, 2013 at 13:27 IST

Citizens wish to know alternatives and opportunity costs of not
increasing the price of natural gas. How do we increase domestic
production of gas, and coal so that our balance of trade problems do
not adversely impact our economy? Unlimited imports of coal or natural
gas or other petroleum products over a long period of time are neither
advisable nor possible. No one is sure of the prices of these
commodities over a period of say 7 to 10 years. Further, our current
account deficit is a huge concern and, therefore, we must seize every
possible opportunity to increase domestic production of all petroleum
products and coal, too. But without foreign capital is it possible to
hike production? The cascading effect of increase in prices of
petroleum products on inflation is a matter of serious concern too,
but no easy solutions have ever been suggested by economists.

from:  Narendra M Apte
Posted on: Jul 8, 2013 at 12:48 IST

I request 'The Hindu' to kindly take up the movement as you have been
doing on Chennai rights and try to make this issue more highlighted in
general public. Please expose the unethical stands of the opposition
parties and the Govt. If it doesn't make the prices to come down, it
will make the people think and at least the opposition to rethink.

Please do so.

from:  saravana
Posted on: Jul 8, 2013 at 12:01 IST

A magisterial clear exposition, understandable to the layman, of Indian energy issues, which the government and other experts keep hidden from public view with tangled statements loaded with jargon and arrogant assumptions of knowing what is best. In addition to its erudite in-depth knowledge, the article sketches out the political landscape in which energy decisions are taken with wry dignified sarcasm. Literary belles lettres are out of style but The Hindu still manages to publish one every now and then as an op-ed.

from:  vithal rajan
Posted on: Jul 8, 2013 at 11:28 IST

The author should know that gas price increase is only to pass on immediate benefit to the
major donor of the much needed party funds for Election 2014 and common man with less
intelligence is already aware of this and no expertise needed. If at all PM and his Cabinet
want to incentivize gas exploration, the best option would have been to call for tenders for '
expression of interest' and the participants should have been asked their competitive price
just like any government without any self interest would have done. Or, costing of gas on the
experience of ONGC through energy experts should have been done instead of bowing
down to RIL's pressure, and every one knows that RIL has been sitting pretty on KG6 gas
and successfully blackmailed the lame ducks in Petroleum ministry who were guided by
Congress bosses requiring funds for 2014.


from:  MvjRao
Posted on: Jul 8, 2013 at 11:22 IST

It is ironic explanation given for the steep increase in Gas prices.
Even after 20 rounds of NELP no major petroleum company has found it
fit to invest in Green fields of INDIA.

Our petrolem minister is given wrong information that India is rich in
Crude oil and natural gases.

Our country was not even ready to utilise gas as late as 1990, when we
were 70% self sufficient in our petroleum products. In ONGC oil fields
Gas was flared in order to produce much needed oil for our country.
Plans were put into place by 1998-99 to utilise gas for our power
generation purposes, but most of Process gas compressors of ONGC Off
shore are idle for want of Gas.

Even Reliance is not able to produce 80 MMT gas from East coast even
though they can hire any world class specialist to enhance production.
Producing Gas from Deep sea is all together different Ball game and
none in the country is having technology.PETRONAS,Brazil are able to
produce huge quantities of Gas from OFFSHORE fields,why notINDIA

from:  Sathyan
Posted on: Jul 8, 2013 at 10:36 IST

Dear madam,
Another point to the long list of reasons you have cited is the oft talked problem of land and
labour in our country, which can cripple foreign/local players willing to invest; Posco's India
journey is an example (although not directly comparable). Our land disputes, within the
country (in Odisha, UP etc.) or outside (South China sea) dont seem to reach a consensus
ever. The labour disputes are a relatively new story but an equally tragic one, striking
workers at bajaj or maruti have held suppliers, end users, oems and the economy(to an
extent) to ransom. India is facing a crisis of epic proportions, even with the exchange rate
hammered, exports haven't improved. We are simply not able to produce what the world
wants and at the quality it wants. As you have rightly pointed out, the upstream buyer will not
benefit so why wouldn't he go for the more reliable import route. And when the upstream
buyer is not interested in the domestic production why would someone invest?

from:  AT
Posted on: Jul 8, 2013 at 10:09 IST

It took me one hour to read and understand this article. Though the
ideas presented in the article are very rational and sensible I wonder
how common people will grasp such esoteric technical concept.

Hence, perhaps people cannot be the judge here. CAG audits, pressure
group lobbying and petitions in SC are the way out.

And if such explorations run on the production sharing agreements,
then why we cannot have them under RTI? Won't it make compulsion on
Reliance as to what were their technical problems for last two years?

I don't know. But this all issue has very little political relevance
though economic burden might be the great.

from:  Mahesh J
Posted on: Jul 8, 2013 at 09:33 IST

Sudha's aricle is on the mark w.r.t. fact that incentivizing exploration by hiking the price is
unlikely to work, given the experience of import pricing parity with oil. Her point about how
the gas pricing formula is crazy in the absence of a globally competitive market for gas is
also very pertinent. However where i disagree with her is on the link to nuclear energy. The
article seems to allude that the lobby behind hiking gas prices had an intent to favor US
nuclear operators. This is a red herring ! First of all, the reason nuke operators have not
ventured despite the 123 is not the cost, but the concern over liability clauses. Unless the
govt dilutes these liability clauses, nuclear is unlikely to take off ! So linking the gas price hike
to nuclear operators is akin to the proverbial red herring ! The most straight forward
explanation to this decision, which already has found a mention in sethi's article, is the lobby
for reliance, reliance, reliance !

from:  Gajamani
Posted on: Jul 8, 2013 at 08:05 IST

The basic fact to be appreciated regarding the energy scenario in India is that we are woefully deficient relative to the demand. This may be partly due to our basic natural resource endowment and partly due to policy problems that have encouraged consumption and at the same time adversely affected supplies. This can be done either through a market pricing mechanism or through a rationing system for each and all forms of energy. We have a choice here. We need to consider how energy intensive our industries and our day-to-day life should be, and also how far we can go with renewable energy, including hydro-electric. We need to debate and discuss the pros and cons dispassionately; but this is often lost in the decibels of public posturing.

from:  Prosenjit Das Gupta
Posted on: Jul 8, 2013 at 07:01 IST

Energy resources are depleting fast, increasing in price - subsidies
only delay developing alternatives - Price-hit will make people waste
less, also alter their lifestyles to make it more manageable. Govt
should also cut subsidies to power/energy/water used by industry and
agriculture - will teach industry to use less, find alternative ways to
manage costs. Necessity is the mother of invention - less government is
better government.

from:  Venk
Posted on: Jul 8, 2013 at 03:55 IST

The innuendo that somehow the proposed increase in gas price is to
benefit the US nuclear power industry is far fetched to say the least,
it is rather downright insidious in the same vein as those claiming
that 9/11 attack was the perpetrated by the US itself! This type of
irresponsible conspiracy theory undermines the rest of the article.
Anyways, I would like to ask the writer how does she propose that
India increase its oil and gas production? By keeping the domestic gas
price below (Indian) market rate (imported LNG that costs $13/mmbtu is
converted to gas to supply to the consumers)? So far the price of
$4.2/mmbtu didn't help to increase domestic production. To imply
(without providing the rationale) that market rate crude pricing has
incentivized ONGC to procure (with meager record, losing to Chinese
firms almost every time latest being Kazakh deal) foreign oil assets
IMO is another instance of irresponsible writing. I feel the writer is
merely playing to the populist gallery.

from:  Suvojit Dutta
Posted on: Jul 8, 2013 at 00:44 IST
Show all comments
This article is closed for comments.
Please Email the Editor
The Hindu presents the all-new Young World


O
P
E
N

close

Recent Article in Lead

Harvest of controversy

Decisions on genetically modified crops cannot be left to experts; technicalities need to be supplemented by answers to people’s anxieties »