Opinion This budget,step on the gas

The subsidies on LPG,petrol,diesel and kerosene have to be contained if the FM is to balance his books. In 2011-12,for instance,the policy compelling oil marketing companies to sell below cost effectively drained the exchequer of approximately Rs 130,000 crore. This estimate is premised on a crude oil price of $110 and an exchange rate of Rs 49 for a dollar. Given that the current price of Brent crude is hovering around $120/bbl and that the Middle East is riven with tension (the Iran nuclear impasse),production has been cut back in Sudan,Yemen and Syria,and Saudi Arabia has effective surplus capacity of only 1.5 mbd,this price premise may well be too conservative. And as such,the subsidy burden for 2012-13 could be higher. The FM is,of course,cognisant of the importance of aligning the domestic price to market levels,but his hands are tied by politics. The situation is no different with GST. Here too,the FM appreciates the importance of streamlining the petroleum taxation structure through GST but he is not able to do so because of the dynamics of Centre-state politics. Petroleum products consequently remain outside the ambit of GST. Given thus that both subsidies and GST fail the condition set out in my question,my answer is,“reduce the import duty on gas and grant the commodity ‘declared goods’ status.” There are several reasons why I believe these two measures should find space in the FM’s budgetary text.

The first has to do with the worsening petroleum demand-supply balance. Currently,we import 80 per cent of our oil requirements but if one were to extrapolate from current trends,this dependence will push beyond 90 per cent by 2020. Moreover,the production of gas is fast declining. Reliance was,for instance,expected to produce approx 60 mmscmd from its Krishna-Godavari basin discovery and the allocation of gas had been made accordingly. But in 2011-12,it produced only 43 mmscmd and now the petroleum ministry has projected that supplies will come down to 28 mmscmd in 2012-13 and 24 mmscmd in 2013-14. Priority sectors like power and fertilisers that had been assured supplies,are now scrambling to find alternative fuel and feedstock.

This growing demand-supply imbalance raises important strategic questions. How best can we secure our future energy supplies? What must be done to guard against price and supply volatility? What policy changes are required to optimise the mix of imported fuels? These are difficult questions to answer but I would posit that all responses should project a strong role for natural gas.

For a start,there is an abundance of gas within our geography. On our eastern border,there are Myanmar and Bangladesh,with large reserves that have to yet be monetised. Mozambique and Tanzania have made massive discoveries. Industry reports estimate the gas reserves to be between 50-60 trillion cu feet,which if correct,would be 4-5 times larger than that established in the Krishna-Godavari basin. The Central Asian republics of Turkmenistan,Uzbekistan and Azerbaijan (and of course,Iran) are still looking to pipe gas into the Indian market. The point is,unlike oil for which we are overwhelmingly dependent on the Middle East,there are diversified possibilities for accessing gas. Gas offers us greater immunity from the vicissitudes of geopolitics. The second compelling reason is commercial. Gas is cheaper than oil — a fact that may well get accentuated as new discoveries come into the market. The example of the US is worth noting. Five years back,US gas was priced at around $5.50/mmbtu. Today,it is selling for less than $2.50/mmbtu. This is because of the four-fold increase in production from shale formations during this period. Shale gas is abundantly available — China,for instance,is estimated to have a huge potential and there is therefore,every possibility that a comparable price revolution might occur elsewhere. In all events,India can look forward to sharply lower gas prices in the future.

Beyond supply security and commercial logic,there are two other reasons for encouraging gas. One,it can be used as a substitute for transportation fuel (via CNG) and as an alternative to LPG/kerosene for cooking and lighting (via piped natural gas). This would substantially reduce the subsidy burden. Second,it is a relatively clean fuel. Carbon dioxide emissions from a gas-based power plant are 50 per cent that from a thermal plant.

For these reasons,I would recommend the finance minister bring down the duty on imported gas/LNG from 5 per cent to 0 — the same level as crude oil and grant it “declared goods” status (as has been granted to power and coal). The positive fallout will stimulate demand and incentivise investments in import facilities and pipelines — the sine qua non for accelerating usage. Gas is a low-hanging fruit without political colour. The FM should pluck it on March 16.

The writer is chairman of the Shell group of companies in India. Views are personal