Gas and hot air

Delhi’s chief minister does not appear to realise that at the heart of the gas pricing policy lie questions of energy self-sufficiency and security.

Updated: February 14, 2014 9:19:31 am
Delhi Chief Minister Arvind Kejriwal with Manish Sisodia. (PTI) Delhi Chief Minister Arvind Kejriwal with Manish Sisodia. (PTI)

Delhi’s chief minister does not appear to realise that at the heart of the gas pricing policy lie questions of energy self-sufficiency and security.

Delhi Chief Minister Arvind Kejriwal’s latest charge in the name of corruption provokes the thought whether the leading light of the Aam Aadmi Party is at all serious about the cause he claims to espouse. The more closely one looks at his actions of the last month, Kejriwal comes across as a stereotype politician, one who stays away from serious governance issues, obfuscates facts to make headlines, prefers street protests to sitting in office and doing his job, and is now stretching the mandate of his government to block the new gas pricing policy.

In many ways, he seeks to unsettle and disrupt. And, objectively, there’s nothing wrong with that. It could even do some good as long as the intent is constructive. The FIR on gas pricing and collusion, unfortunately, lays bare something more than just intent — it exposes a willingness to lean towards the conspiratorial for apparent political gains, a most dangerous tendency for a new chief minister.

First, the allegations raised in the FIR are already being heard by the Supreme Court. So why does one need another complaint? Clearly, this was not legally thought through. And if it was, then, even more dangerously, immediate political mileage found priority over sound policy. One usually finds this attitude in the last days of a government, but Kejriwal’s is barely a couple of months old.

The gas pricing policy has to be seen separately from the Reliance case because India, as an energy starved country, needs natural gas and has to find a way to produce more. Indeed, India has barely exploited its own domestic potential which, analysts say, is now up to 91 trillion cubic feet. But for India to produce more, it has to make production a lucrative business proposition while maintaining reasonable price levels. How else does one attract investment?

With gas import prices anywhere up to $14-15 per million British thermal units (mmBtu), it may just be wiser for many Indian companies to invest in fields abroad and export the gas back to India at higher prices. This way, the AAP may feel more reassured, but it would come at a cost much higher than the extra foreign exchange the country would have to shell out — and it would make India more dependent and energy insecure.

However, if the objective is to strengthen India’s energy profile, make it more self-reliant in the long run and build a whole new economy around this technologically intensive production activity, a more robust and realistic policy frame is essential. As domestic demand for natural gas increases, production will have to take place from areas with challenging terrain, including the high seas. It’s here that the cost of investment increases. But along with that come technology upgrades and, hence, innovation that helps build new capabilities.

Thus, the price India offers to its potential producers at this early stage is central to its long-term economic and strategic objectives. It is from this standpoint that the Rangarajan Committee went into the question of pricing. Unlike crude, where there are established international benchmarks for pricing, gas has no such international peg. There are essentially three key gas exchange markets — the US’s Henry Hub, which is purely defined by market prices, the European exchange and the Japanese market, since Japan is among the largest consumers of natural gas.

The committee devised a formula by which a weighted average of these three markets would be taken. From it would be deducted the transportation and linked costs usually paid if the gas was imported from a country like Qatar — which supplies India a lot of its LNG — and eventually, a price would be arrived at every quarter. It was agreed that one quarter lag would be maintained while calculating the weighted average because it would be practically impossible to calculate at current rates.

This broad formula, when applied now, gives us the price of about $8.4 per mmBtu from April 1. For the moment, this was seen as the best approach to, at least, set the ball rolling and it has found acceptability among investors.

The Reliance case is on a different plane. There are issues about the company not meeting its production target. The company and the government have been in court. An arbitration proceeding is underway where both sides have appointed retired chief justices. They could not mutually agree to a third judge, so Reliance has approached the SC to appoint one.

In the meantime, both sides have agreed that the RIL-led consortium will deposit a bank guarantee to cover the additional price they will be paid. In case the arbitration goes in favour of the government, it can encash the guarantee. PILs on this have come up in the court, and that is where the matter must be decided.
But why hijack the gas pricing policy for this? In fact, the biggest immediate beneficiary would be ONGC, a PSU that produces maximum gas domestically, although that cannot be a policy objective in itself.

What the Delhi chief minister has to realise is that at the heart of this policy lies the more complex question of trying to achieve energy self-sufficiency and energy security — one that has huge implications for India’s economic future, and which certainly does not deserve to be hijacked by a blame-all conspiracy mindset.

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