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A wrong turn on energy

Sudha Mahalingam
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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 )


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