In an honest academic endeavour to explain the well understood Rangarajan formula, Prof. Sengupta exposes most, though not all, of its shortcomings in establishing a defensible well head price for Indian gas. These shortcomings were detailed in my articles in The Hindu – editorial page, “Making a mockery of domestic gas pricing,” January 18, 2013, and Op-Ed, “Debate@The Hindu,” “A committee to ‘administer’ a ‘market price’ for gas,” February 7, 2013. Prof. Sengupta also upholds my July 1, 2013 opinion in The Hindu by questioning the $8.40 price — now repudiated by the government — and the government’s decision to reward existing producers without addressing their blatant abuse of PSCs.
His argument is that since global gas markets are fragmented and illiquid and the Rangarajan Committee could not assess how well head prices are determined elsewhere in the world, they chose to theoretically impute a well head price based on indices and prices that do not by themselves represent well head prices anywhere. Sadly, this approach fails to deliver a competitive arm’s length well head price for Indian producers of dry conventional natural gas. The hub prices used as surrogates for the American and the European markets are mere indices and very little, if any, gas gets traded at these hubs at the quoted prices. In any event, the hub price index includes transportation to the hub and in the case of the U.K.’s National Balancing Point, the price index covers piped natural gas and LNG linked to crude — a concept that Prof. Sengupta himself questions for the LNG-dominated Asian market. Averaging incorrect and unrelated numbers cannot deliver the right answer. As for macroeconomic imbalances, a higher subsidy burden for fertilizer and power is as consequential as rising imports. And Prof. Sengupta admits that the right incentive structure for raising domestic output must go beyond the price for gas.
The core questions raised in my July 1 opinion remain unanswered. Can Prof. Sengupta identify any gasfield in the world that receives even his lower estimated price of $6.835/Mmbtu at the well head for dry conventional natural gas?
(Surya P. Sethi is formerly Principal Adviser, Power & Energy, Government of India, and Adjunct Professor, Lee Kuan Yew School of Public Policy, National University of Singapore.)