Domestic Natural Gas Pricing

Natural Gas pricing announced on 18^th October, 2014 has once again confirmed that it is based on politics and not on Fair market concept. In reality, UPA Government decision in 2007 broke the backbone of Fair Natural Gas Pricing system when Pricing was fixed, disregarding Gas on Gas competition-Arm’s Length pricing envisaged in PSC.Subsequently, it was all politics and nothing else. Let us not forget—it was all intentional to favour one producer.

Pricing Policies:

On 18^th October, 2014, the Government of India announced revision in Natural gas Pricing effective from 1^st November, 2014.The current price from November, 2014 to March 2015 is $5.05/MMBTU based on Gross Calorific Value (GCV) and $5.55/MMBTU on Net Calorific Value (NCV) i.e. on the same basis as earlier price of $4.2/MMBTU fixed in 2007 for 5 years. The revised price is certainly significantly lower compared to $ 8.4/MMBTU; the price almost fixed by the UPA government but could not be implemented.

The issue is not about lower or higher price but Fair Price?

Dr.Rangarajan committee, set up by UPA government based its pricing on:

(i)            Netback pricing of Japanese  LNG,

(ii)            Henry Hub Gas price in USA and

(iii)          National balancing Point (NBP) Gas price in UK.

Pricing Review Committee (PRC-2014) set up by NDA government made following changes to the earlier pricing based on Dr.Rangarajan committee:

(a) Netback pricing of Japanese and Indian import component of LNG is removed.

(b)Canadian (Alberta) gas price is included in lieu of Henry hub Gas price.

© Russian gas price is included in lieu of National Balancing Point (NBP) price of UK.

The notified pricing will be reviewed and revised half yearly

Politics of Pricing!

PRC-2014 is right in removing the LNG component from the Gas pricing formula as price of LNG has no relevance to the price of Natural Gas, but it is not clear why pricing based on Henry Hub is changed to Alberta and NBP to Russian. It is requested that the details are published to bring transparency.

Both Dr.Rangarajan and PRC-2014 have premised that the price of indigenously produced Natural Gas in India is linked to the prices prevailing in various/some parts of the world. It is acceptable, if either Natural Gas in India is the natural home from these locations or it is traded internationally like Oil. Unfortunately, neither is true and therefore, the pricing mechanisms of both the committees are conceptually flawed and unfair.

It appears that Dr .Rangarajan had a pre-scripted Gas Price from UPA and PRC-2014 from NDA government .Both the committees did the rest to please their political bosses. In the absence of details, we do not see any other justification for linking prices to such alien locations having no relevance to Natural Gas produced in India. It is sad that PRC-2014had an opportunity to correct the conceptual flaws and anomalies of Dr.Rangarajan’s formula as expert opinions and criticism on it click were already in the public domain

Real damage to the pricing concept of Natural Gas was done in 2007,when UPA Government arbitrarily disregarded the clause of “Arm’s Length Pricing” of(Production Sharing Contract) PSC and fixed the price of Natural gas at $4.2/MMBTU through manipulated tendering system carried out by Reliance on the directive of  the Government. Today, it is impossible to use the concept of Arm’s Length Price of PSC, which is based on Gas on Gas competition as Indian natural Gas market is imbalanced due to fiasco in gas production in Krishna Godavari basin.

It is true that “international Oil prices are dependent upon geo political factors” But it is sad to note that Natural gas Price is being used as political tool in India and has destroyed the basic fabric of fair pricing.

The issue now arises—what is next?

Forward Path:

We believe that so much damage has been done in pricing of Natural Gas since 2007 that it is now not possible to repair the same and revert back to PSC for existing producing fields. At best, we can prevent further damage and erosion of faith in The Indian system by the stakeholders and international community.

Suggested Mechanism:

In 2007, Natural Gas price was linked to Brent crude oil.  Linking the price to Brent crude oil is not the best option as gas price should be linked to the competing fuel oil, which is Fuel Oil, Naphtha and/or Coal dependent upon its end use. It is true that Brent is internationally traded crude oil with transparent pricing. Price of Naphtha and Fuel Oil are also linked to Crude oil prices. Pricing mechanism linked to competing Fuel is being used for almost 23% of world Gas production and is considered the best method for pricing Gas where the same cannot be fixed on Gas on Gas Competition.

Conclusion:

The Price of Natural Gas in India for existing producing fields should be linked to Oil. It will be desirable to link it to the basket of Naphtha, Fuel Oil and/or coal. Since Gas price in 2007 was linked to Brent Crude Oil, it may also be alright to include Brent Crude Oil  in the basket. Review should take place only if price of one or more of the linked product(s) crosses the band on either side. Otherwise, Formula is binding. 

Gas Price and Modi Sarkar

NDA Government’s recent decision to revise gas price from $4.2/MMBTU to $ 5.61/MMBTU,effective from 1st November,2014 has surprised many. The increase in gas price by $ 1.4 /MMBTU as against the decision of earlier UPA government to increase it to $8.4/MMBTU will certainly convince many that Modi Sarkar Mukesh Ambani Ki Dukan Nanhi hain .It will also give NDA considerable political mileage.

We examined the issue critically and our analysis indicate that it is a very clever move to silent the critics and also to look after RIL interests. As per our experience, Reliance is normally favored only by such moves. Initially a public perception is created through some pseudo moves that the Government decisions are in public interest and anti Reliance. After sometime, Reliance is given more than its expectations. 

Our view is that the present increase in Gas price is not meant for Reliance. The increase is for production from existing fields. Any increase does not bother Reliance as there is hardly any gas production from KGD6, barely 7 to 8 MMSCD.

According to media reports, RIL is trying for deep water exploration wells in Mining Lease areas in KG blocks. The PSCs do not permit this. In this regard,  a Cabinet Note was also prepared in March, 2014 under UPA government but the same could not be cleared due to Code of Conduct for Lok Sabha elections. The possibility of this approval by the NDA Government cannot be ruled out. After all, the core planning is of Reliance. Government is just to OK it.  Once cabinet approval is done in the national interest—to produce more gas indigenously, RIL will have a big Cake. Another price will be announced, much higher, to justify higher cost of production of Deep water drilling. Who can have the objection? What is the Catch?

We have no issue with Deep Water drilling but do have a serious concern, if Cabinet Approval is given to RIL/BP/NIKO consortium as extension of the existing contract.

In this regard, Extract from the Draft Cabinet Note is reproduced below:

 “Article 21.5.12 of the PSC states that “In the event of the Contractor does not commence the development of such discovery within 10 years of the date of the first Discovery well, the Contractor shall relinquish its right to develop such Discovery and the areas relating to such discovery shall be excluded from the Contract Area.  The first discovery in the block was made on 29.10.2002 therefore the ten year period has expired on 29.10.2012”.

RIL press release dated 24^th May, 2013 indicates huge reserves of Gas in deep water at 5000 meters. This test drilling was carried out by RIL-BP in early March’2013 after the government permitted companies to drill exploration wells in areas where exploration period had long expired.

The basic issue arises,” Why Government allowed the consortium to test drill in an area which no longer belonged to them and then prepared a Cabinet note to give a go ahead signal.

We welcome new discoveries and development in Oil and Gas Exploration. However, permitting Reliance under the existing contract should not be allowed. The contract should be awarded on the basis of fresh International bidding so that the nation gets its due share.

We would like the Government to clarify its position on:

Q1. Is Government considering Deep Water  exploration drilling in  Mining Lease areas of Krishna Godavari Basin to increase Gas Production?

Q 2 Do the PSC provisions permit such exploration drilling 10 years after first discovery as extension of contract to the existing contractor?

 Q.3 In case Deep Water drilling is envisaged in ML areas will it be carried out by the existing consortium of RIL/BP/Niko or will there be fresh International bidding?