The gas price hike for Reliance was objected to by senior BJP leader Yashwant Sinha in July 2013. As Chairman of Standing Committee on Finance, Mr Sinha wanted a re-think on the Rangarajan Committee's formula on increase
The gas controversy is taking an interesting turn. The Government refuses to cancel the contract with Reliance, pending arbitration. Union Minister for Petroleum and Natural Gas Veerappa Moily remains firm on increasing the price to $8.4 per million Btu. There are provisions for a further price increase to $13.8 per mBtu. It is almost a continuous process of mounting losses on the nation. Reliance itself in the court has said that its production cost was $1.43 per mBtu.
Meanwhile, according to reports, Reliance has started drilling wells in D6, though so far it has yet to get environmental clearance. Apparently, after years of dilly-dallying, the company has started its work despite issues remaining in arbitration. This has also drawn flak from the public-sector ONGC. It has complained that Reliance has dug a well just 200 metres from its operational well in the Krishna-Godavari basin. The ONGC has virtually said that its gas would be robbed.
Interestingly enough, ONGC has not said a word on the gas price hike. It wants to sail on about Rs 16,000 crore additional profits due to the price hike. According to ONGC, its production cost is around $3.6 per mBtu.
The price hike is ominous because it would increase subsequently transportation, fertiliser production and many other costs. The impact would be an overall inflation and unnecessary heating up of the economy, particularly at a time when the industry is grappling with the high costs and fall in demand in the market. It would not be easy for the new Government either to roll the prices back or contain inflation.
The Power and Fertiliser Ministries have already expressed concern over the hike in gas prices and their adverse impact on power tariffs and fertiliser pricing.
There have been questions as to why the price of petroleum products produced in the country and used for domestic purposes are pegged at international levels. This is having a severe impact on the economy. It appears that the policy orientation is not pegged at benefit to the nation but is limited to the profits of some companies. It needs a change so that the entire economy could benefit from domestic production and help costs and subsequent market prices remain at low level.
Former Principal Adviser (Power & Energy) Surya Sethi has pointed out in his article in a leading daily that nowhere in the world is the price of well-head gas linked to the price of liquefied natural gas. He has also pointed out that the spot price in the Henry Hub Terminal today is $3.77 per mmBtu, and this is also higher than the well-head price of gas in the US. In Gulf countries, the price of gas is only one dollar per mmBtu, in Egypt $2.57, in Nigeria $0.11, in Australia five dollars and in Indonesia around one dollar.
The gas price hike was objected to by senior BJP leader Yashwant Sinha in July 2013. As Chairman of Standing Committee on Finance, Mr Sinha had suggested a re-think on the C Rangarajan Committee’s formula that had advocated the hike. Mr Sinha did not find any substance in the Rangarajan panel’s recommendation for fixing domestically-produced natural gas price at an average of international hub prices and cost of imported lNG, instead of on the present mechanism of market discovery. The committee considered it a default and not a failure. There is no punishment for default except cancellation of the contract, according to Mr Moily.
Communist Party of India MP Gurudas Dasgupta has said that the Moily formula was for continuous rise and the price of $8.4 is not the final price as RIl had demanded a price of $13.8 per mBtu in due course. He says it is to benefit the private company and increase Government’s subsidy burden by Rs 76,000 crore for importing it.
Reliance itself admitted in a court case between it and NTPC/Anil Ambani Group that its production cost was $1.43 per mBtu. RIl had initially agreed to supply gas at $2.34 to both NTPC and ADAG, which it subsequently reneged once the Empowered Group of Ministers set the price at $4.2. It might be noted that by its own calculations, RIl would have made profits of 50 per cent if it had supplied gas at $2.34.
The Oil Ministry and RIl have locked horns over the reasons for a sharp decline in gas output from KG-D6 block for last three years, virtually since 2009. Output from D1 and D3 gas fields in the block fell sharply after achieving about 62 mmscmd about three years ago. The fields are currently producing less than 10 mmscmd gas, which is far below the peak output of 80 mmscmd.
Mr Moily’s predecessor, S Jaipal Reddy, had in May 2012 slapped a penalty of $1.005 billion on RIl for lagging behind in gas productions. Mr Reddy had commented that the company by not producing the gas was virtually hoarding it. RIl disputed the penalty and arbitration was initiated. However, no similar notice seeking fines has been issued for 2012-2013 — even though Reliance has admitted that its gas production will reach only 1.847 trillion cubic feet, against a target of 2.957 trillion cubic feet.