The Government's decision to double the price of gas to $ 8.4 per million BTU from April 2014 will hurt the budgetary deficit and the CAD more than its reputation. The fertilizer sector is the second largest user of natural gas with an off take of approximately 13,000 million cubic meter a quarter of the gross national consumption will be hit the hardest. It also is one of the three heavily subsidized sectors with a subsidy payout of Rs 672 billion ( Rs 67200 crores) in 2011-12. The Government had planned to reduce the subsidies for the fertilizer sector which is heavily dependent on natural gas as a fuel.
Doubling the price of gas will leave two options for the Government. Either it increases the domestic subsidies for production of urea or imports more fertilizer. The first option will hit the budgetary deficit and the second will kill its dream of reducing the CAD. Already domestic production of fertilizer have been stagnating and imports have been rising perilously during the ten years of UPA rule.
The domestic producers of natural gas will not really hurt in case there is no price revision in gas. Over 50 % of the natural gas consumed is being produced by ONGC, 10 % by other PSU 's and JV's 10% by private producers and 30% is imported. However ONGC is hurting more from the subsidy sharing arrangement of petroleum products which has forced upstream oil majors to chip in over Rs 500 billion (Rs 50,000 crore) annually towards petroleum subsidies. It is a much bigger money lost for ONGC, nearly ten times what it would gain from price rise of natural gas. It would be more prudent to give ONGC and other OMC's like IOC, HPCL, BPCL and OIL some break in current subsidy sharing arrangement than raising gas prices to set of a vicious price spiral. This is because it is not only LNG ( ethane +methane) whose price will jump but also LPG ( propane + butane) whose prices will rise hitting domestic inflation. This is something that the Government is struggling to control today.
ONGC sources say that had it been able to start production from its adjacent, the KG-DWN-98/2 which is estimated to have gas reserves of 14 trillion cubic feet and sits next to the Reliance Industries KG - D6 fields, it could easily have ensured a lower price of gas of $4.2 per mBTU with its own wells. However its efforts to rope in Norway's Statoil and Brazil's Petrobras with equity and technology partnership to the extent of 25% came to nought in April 2010 when they were frustrated and driven away by the petroleum ministry babus who sat over the approval files for more than one year. Strangely no enquiry has ever been leveled on why the approval for exploration as an ONGC partner with high FDI was delayed.
As for the RIL KG-D6 block it has become a negligible player in the market with its output dropping from 62 mscmd of gas in 2010-11 to 33 mscmd next year and to just 14 mscmd in 2012-13. Currently its production is down to 10 mscmd and may further drop next year as per knowledgable sources. Signing a hypothetical BG with RIL, that it will be allowed to charge increased prices provided it starts producing more or is not proved guilty in the gas suppression enquiry, needlessly opens the floodgates of corruption charges against the UPA Government.
Apart from this the Government will have to repeatedly respond to the questions asked by Gurudas Dasgupta and several other MP's on why the RIL contract should be not terminated for non-performance and non delivery of 154 mscmd gas during the last four years. The average lease period of an offshore block in Gulf of Mexico has been reduced from eight years to five years by the US Government in 2011. That RIL is squatting over the KG-D6 gas block either in hope of increased prices or due to technology issues does not mean that it should be given an unlimited time frame to produce gas from the exploration site. Even though India is not a matured economy it must set time to its resources for exploitation by third party explorers and one day Governments will have to take a call on this account.
Lastly there is an need to investigate why gas prices have been rising in India when it has fallen globally. The US Henry Hub gas prices which touched a 10 year low during 2012 has risen now but is still way below what it was even three years ago. It forced Exxon Mobil and other gas producers to renegotiate their long term contracts at reduced prices. India failed to drive down its long term buying prices from the Middle East, even then, because the petroleum ministry was not smart and well informed. The crude linked gas pricing formula that India has with Gulf nations is also something that needs to be reviewed and re-worked in the long term. One would need to investigate why gas prices in India went up during the 2012 global glut? Is there a cartel at the thriving spot market of Dahej and Hazira terminals the feeder points to the Gas grid and HBJ pipeline where prices tend to be volatile and RIL,ONGC, Essar, Cairn, BP, Shell and Petronet are supplying gas to the Indian industry?
