Journalism of Courage
Indias energy sector is at a crossroads. While there is a growing realisation that prices of output like electricity need to be rationalised,the spike in prices of coal and gas is threatening an emerging regime where fuel costs would be a pass-through item. In Part 4 of this series,we highlight the implications of gas shortage for various stakeholders.
Reliance Industries KG-D6 gas block was a big promise. If the block was as prolific and cost-effective as it initially seemed,it could have solved at one stroke many of the vexed issues in Indias energy sector. Remunerative returns to investors in power,fertiliser and other strained sectors could have been ensured without pushing consumers to the brink. And the countrys fiscal position could have been managed rather less strenuously. But that apparently remained a dream.
With output at KG-D6 having plunged,domestic gas production is stagnating. Import of expensive liquefied natural gas is projected to surpass domestic gas output in 2014-15. That leaves all stakeholders with a lot to worry about. An inflated fertiliser subsidy bill has only one alternative a hike in fertiliser prices,something that farmers groups would oppose. Gas-starved power companies will have to scramble for whatever is apportioned to them as LNG imports could render gas-generated power unviable. Taking the already-delayed city gas distribution (CGD) system countrywide will be challenging. Also,industrial users of gas like steel and petrochemicals companies will have to pass on the additional cost burden on to their customers.
The growing share of gas imports in India’s fuel mix has already given an upward bias to gas prices. Add to this the Rangarajan committee’s proposal to raise domestic gas prices and we could be in for a higher price regime. The committee headed by the Prime Minister’s chief economic advisor C Rangarajan has recommended raising gas prices to $8 per million metric British thermal units (mmBtu) from the current $4.20 and $5.73 per mmBtu range.
Natural gas production in 2012-13 fell to 118 million standard cubic metres per day (mmscmd),down from 130 mmscmd in the previous year as production from RIL’s KG-D6 block continues to slip. LNG imports stood at around 73 mmscd for the year,but is all set to surpass domestic production from 2014-15. Imports come in at a landed cost of around $13-14/mmBtu.
Companies typically get gas from the NELP and KG-D6 gas fields at a base price of $4.20/ mmBtu. ONGC C-series gas is sold at a base price of $5.25 per mmBtu,while gas from the Panna-Mukta-Tapti fields is priced higher at $5.60-5.70 per mmBtu.
Though the debate over the extent of the revision to domestic prices remains alive,the affected parties acknowledge that some amount of price hike is inevitable. With the fertiliser and power sectors getting priority in allocation of gas resources,the impact will be felt most in those industries. Fertiliser companies on their part contend that the impact of an increase in gas prices will not be felt directly by them.
It is the deficit-worn government or already-burdened upstream oil and gas companies that might have to bear the subsidy burden, said a fertiliser company official.
However delays in receiving subsidy have affected fertiliser companies’ performance in the past. The fertiliser ministry has suggested that gas not be priced more than $6.80 per mmBtu,saying that the Rangarajan committee’s recommendation will inflate the subsidy bill by around Rs 16,000 crore. For 2012-13,the fertiliser subsidy bill stands at over Rs 60,000 crore. At present urea is sold at an administered price of Rs 5,310 per tonne,while remunerative price for the companies would be more than double this.
A senior official from upstream player ONGC,however,said that the impact of adopting the committee’s recommendation will not be very significant for the government. First,it will help the government earn higher revenues through taxes,royalties and profit share of gas .
Also,pointing to a Kotak Institutional Equities,report the official noted that the price hike would mean a 13% rise in the subsidy bill and the impact of an increase in gas price on the fiscal deficit would be just 0.1% of GDP.
The power ministry has also stated that any base price of domestic gas beyond $4.10 per mmbtu will be unviable for power generation.
Gas shortages have already stalled several gas-based power projects that have a combined capacity of around 18,903.5 MW,accounting for only 9.13% of the total generation capacity.
At present gas-based power plants are working at just 20% plant load factor (PLF) owing to shortage of the fuel.
According an industry expert,every $1 hike in gas price would necessitate a Rs 0.5/unit increase in electricity tariff. At the prevailing price of domestic gas,electricity generation costs work out to Rs 2.10 a unit. If gas price is hiked to $8-8.50 per mmBtu,generation costs could double.
However,Debashish Mishra,senior director for Deloitte Touche Tohmatsu in India,said the Rangarajan committees recommended price of $8 per mmBtu is a good base price as it is feasible for power companies to procure at up to $10/mmBtu. However,imported LNG at the prevailing levels of $15-16/mmBtu has very few takers.
Gas-based power projects of NTPC will not be impacted by a rise in natural gas prices as they have pass-through clauses in many contracts,which enables it to the pass on the burden of extra price of gas to the consumer as the fuel cost. Private players like GVK,GMR,Reliance and Lanco will be the most affected.
Natural gas production prices will also have an impact on industrial sectors like steel and petrochemicals. With alternative fuel naphtha being significantly pricier,these industries might have to pass on additional costs to their consumers.
The fledgling CGD,which is present in around 50,will face further roadblocks as gas shortages will continue. In the absence of domestic gas,the country is now relying on sourcing highly expensive LNG. The spot price of the cargo is currently at $15-16 per unit and even the long-term contracts are priced high as it is linked to crude.
A Deutsche Bank report notes that Indraprastha Gas,which gets 70% of its gas supply from administered price sources,will pass on any increase in the gas price to consumers.
As domestic production dwindles,downstream companies like GAIL India have begun to to lock in long-term contracts from abroad. Several other Indian companies have long-term LNG contracts with Qatar’s Ras Gas and also with Australia,Malaysia,Oman,and Turkmenistan. Upstream players like RIL,ONGC and OIL have also increased their thrust on overseas buys though equity stakes in blocks.
Ashu Sagar,secretary general,Association of Oil and Gas Operators,said that a lot of investments are moving out of India as gas prices are not attractive in the country. It pays you today to go and get gas in US,liquefy it and bring it here and sell it here and make lots of profits without any risk, he said.
The other option includes transnational gas pipelines. But the oil ministry has said that the commercial operation of $9-billion Turkmenistan-Afghanistan-Pakistan-India gas pipeline is expected to commence only by 2017-18.
