People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 22

June 02, 2013


Gas Pricing: Ambanis Rule the Roost


Prabir Purkayastha


THE ministry of petroleum, after its change of guard from Jaipal Reddy to Veerappa Moily, has been batting for a much higher price of natural gas. This is being supported by Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, while it is being opposed by the ministry of power and the ministry of fertiliser, both pointing out its enormous impact on fertiliser subsidies and electricity prices. At a conservative estimate, we are talking of an annual net transfer of tens of thousands of crores from the pockets of the consumers to the gas producers, and primarily to Mukesh Ambani's Reliance Industries Limited. As the gas and electricity prices are subsidised, it will also mean higher deficits for the government. In other words, an increase of gas prices will not only hit the common man but also the government finances.




The Reliance Industries Ltd (RIL) had initially promised gas at 2.34 US dollars per million British Thermal Units (MBTU) to the public sector National Thermal Power Corporation (NTPC) for its Kawas and Gandhar plants for 17 years. Unfortunately, an empowered group of ministers (EGOM), then headed by Pranab Mukherjee, raised the gas price to 4.42 per mBTU. The Reliance then reneged on its contract with the NTPC, arguing that under the new price set by the EGOM, it could only supply gas at 4.24 dollars. As a result, these plants are still on hold.


At the revised price of 4.42 dollars, under the profit sharing scheme with the government of India for KGD6 gas field, a large share of profits would have also accrued to the government. To avoid this, the Reliance took the simple route of gold-plating its capital costs in the gas field – it claimed that it would double its production from 40 million metric standard cubic metres per day (MMSCMD) to 80 MMSCMD. In actual practice, however, the gas yield dropped to about 30 MMSCMD even though the capital costs went up by four times! The Comptroller & Auditor General of India (CAG) later submitted a scathing report on the actions of both the petroleum ministry and the Reliance on which the government has not yet takes any action.


If all this was not enough, the UPA government wanted to reward the Reliance even more. It set up a committee under Rangarajan, the former governor of the Reserve Bank, for fixing the gas prices. The Rangarajan committee's report makes strange reading. It suggested that Indian gas prices be pegged to a 12-month average of the price of LNG imports to India and the price prevailing in the US, Europe and Japan.


But it is impossible to fathom why the gas produced in India be pegged to the market price of imported gas or to the gas prices prevailing in Japan and Europe who import all the gas they need. After all, the gas found in India or in India's economic zone in the seas is Indian people’s property. If we give a license to a private or public sector company to develop a gas field, their costs should indeed be compensated along with a reasonable profit. But why should they be allowed to make windfall profits merely if the international price of gas rises? In what way is the price of gas in the international market linked to the cost of gad production in India?


An international price parity to Indian producers would make sense only if they are importing the gas or if there are large amounts of raw materials they have to import. Such is not the case here. So why this need to peg the price of gas produced in India to the international market prices?




The implications of the Rangarajan committee's recommendations are enormous. For every dollar increase in gas price per mBTU, the annual fertiliser subsidy would rise by Rs 3,155 crore and the cost of fuel for the power sector would increase by Rs 10,040 crore per annum. The Rangarajan committee had suggested a graded rise of the gas price --- starting from 8.8 to about 14 dollars by 2017. Taking only 8.8 dollars as the basis, however, the annual outflow in terms of subsidies to the fertiliser sector would be Rs 16,992 crore  and the increase in the cost of fuel for the power sector would be Rs 43,360 crore. We are thus talking of a total amount of Rs 240,000 crore for a four year period.


The benefits of this increased price to Reliance is equally staggering – it is of the order of Rs 80,000 crore!


The petroleum ministry submitted a note to the EGOM, headed by A K Anthony, for accepting the Rangarajan committee's proposal of 8.8 dollars. Already, the ministry of fertiliser and that of power have submitted detailed notes on this issue to the EGOM, opposing this move. Though the finance ministry had earlier rejected linking the Indian gas prices to the international prices, it has suggested a watered-down formula which would lead to a rise of gas price to the level of about six to seven dollars. The basis of such a compromise formula is again not clear. The Planning Commission under Montek Singh has more or less echoed the Rangarjan committee's proposal.


Initially, the EGOM lead by Anthony was supposed to decide on the price of gas as also its allocation. It is now understood that the Cabinet Committee on Economic Affairs (CCEA) would be taking a decision on gas pricing, restricting the Anthony led EGOM to only gas allocations. It is also understood that Moily is now arguing for a lower increase, a price of around six to seven dollars initially.


The question here is not what should be the price of gas but the principle of pricing. Is it to be based on international market prices? Or is to be based on some concrete understanding on how we should price our natural resources? Tomorrow, shall we price our coal or our drinking water on the basis of the market price of coal and water in the US, Japan and Europe, as the Rangarajan committee would have us do for gas?




The key issue here is the one of pricing our natural resources – be it tangibles like coal, gas and water or intangibles such as airwaves. When it comes to airwaves – the spectrum – the government is arguing that it should be kept low in order to lower the subscriber prices. But when it comes to something even more basic – the costs of energy – the government of India wants them to be linked to the international prices. This might appear to be contradictory, until we look at the beneficiaries. If it is Mukesh Ambani in the case of gas, it is Anil Ambani in regard to coal or spectrum. The Ambanis' interest thus drives this government, whether it be gas, coal or spectrum!


The Left parties have protested against this completely bogus proposal of linking the Indian gas prices to the international prices. Tapan Sen, MP and a member of the parliamentary standing committee of the ministry of petroleum, has pointed out that in Oman, the KRIBHCO and IFFCO have been getting gas at 0.77 dollar per MBTU since 2006 and it increased only by 15 per cent after six years. Nowhere in the world is the price of gas pegged to international prices, except perhaps for some banana republics, which India is now rapidly in the danger of becoming. Gurudas Dasgupta talked in a press conference last week about this new mega scam and pointed out the impact on the fertiliser and power sectors.


Moily's response is quite amazing. He responded by saying that since public sector companies such as GAIL and Indian Oil  are major gas producers, they would also benefit and not only the Reliance. The issue here – which we believe that the minister is not so obtuse that he does not understand – is that while government companies such as GAIL and Indian Oil may benefit, the government will have to shell out even larger amounts as subsidies to the fertiliser and power sectors.


The distribution companies in the power sector are currently in the red by Rs two lakh crore, a position which will worsen even more with this hike in gas prices. Already, gas plants of 28,000 MW capacity have either been commissioned or are in the pipeline. All of them will become sick if the gas price rises beyond five dollars per MBTU. We then have to either write off the investment in these 28,000 MW of power plants or subsidise the huge gap between the gas and coal prices.


Moily has also said that if we do not raise the gas prices to international levels, we would have to import gas which will cost us much more than the current gas prices. Again, this is funny logic: we will have to pay the import prices for all our indigenous gas. In other words, we would be paying import gas prices without importing any gas!


The Reliance is holding the country to ransom by cutting down on gas production and starving the existing power and fertiliser plants linked to the KGD6 gas field allocations. The Reliance has cut down its production from 56 MMSCMD, which it was doing at one time, to about 34 MMSCMD currently. This has already impacted a number of plants, particularly in Andhra Pradesh.


The Tatas and the Adanis had also adopted a similar strategy with success. They cut down their power production when the cost of imported coal went up and claimed that they would not be able to supply power unless their contracts were changed. In both cases, nobody talked about the other solution. If the KGD6 gas fields and the Tata's and Adani's power plants cannot be run under the existing contracts, the government has the right to nationalise them outright and run them on its own. But then, under the current dispensation, nationalisation is a dirty word, while the word capital is sacred --- and so are the capitalists!


The gas pricing issues brings out once again how this government is deeply compromised; or it is ideologically so blinkered that it does not see plain common sense. Knave or fool, take your pick!