Gas Pricing - A Note

Overview
The supply of natural gas to Industries in Maharashtra was made through Bombay High. Fertiliser and Power industry utilised around 80 per cent of natural gas and 15-17 per cent is utilised by petrochemical companies and 5-7 per cent by other manufacturing units.

A decade back prices of natural gas were fixed with flat increase of Rs. 100 for subsequent years (this amount is attributed to cost of finding). The revised pricing policy was announced by government in month of September 1997, wherein the price of gas was linked to a basket of fuel oil prices (this is essentially linked to US and EU markets), with a fixing of the price, the floor price of Rs. 2150 and the celing of Rs. 2850.

The prices were determined by daily average of high and low prices of this basket of fuel oil in equal parts as quoted in Platts Oilgram Price Report. This is taken into account for arriving at the average price of fuel oil basket for the quarter.

The consumer price of gas at the landfall point for the year 1997-98 was to be linked by 55 per cent of the prices of the basket fuel oil for general category. The prices of 1000sm3 natural gas of calorific value 10,000 Kcal/sm3 was converted into rupees form the prices of average fuel oil in US$ per MT as per formula given:

Gas price in Rs./1000 sm3 for 10000 Kcal/sm3=

Average Price of 4 fuel Oil in US$ x 39.68254 x Percentage Parity x Rupee US$ Exchange Rate

The parity percentage was 55 % for the year 97-98, 65 % for 98-99 and 75 % for the year 99-2000. Foreign exchange was to be worked on the basis of the SBI card rate.

The gas prices have not increased since last two years beyond pegged level of ceiling price. And form last year gas prices are pegged with market prices. If the ceiling price will be removed than prices of gas will increase multifold, it will reach to $5 as against $0.80 in Middle East, a difference of almost 600 per cent.

The decision of pricing the gas should be independent of need to match it with international prices. Since gas is indigenous/local product and cannot be imported, gas price need not be linked to matching price of other energy (basket of fuel oil price).

Fertilisers are provided differential subsidies depending on imported and indigenous sources of production. If the price of gas is increased, it will result in an increase in subsidies on fertilisers produced. These subsidies would always be questioned by WTO and India will always be under pressure form WTO to review these subsidies. However, if we keep gas prices low then we are not required to provide subsidy for indigenously produced fertilisers. The same would also be compatible with WTO norms.

Should gas prices be linked with EU and US or should they be linked with the Middle East?
India imports products largely form the Middle East, Indonesia and Malaysia, which has lower gas prices than those prevailing in the US, and the EU markets. Consequently, the prices of downstream products like fertilisers are also cheaper in these markets.

Now, if we link the prices of energy to those prevailing in the US and the EU instead of those in the Middle East, Indonesia and Malaysia, from where we actually import it, we increase the cost of manufacturing of these downstream products in our country. This will render indigenous fertiliser products expensive than those available in the neighbouring countries with lower energy prices. Consequently, these cheaper fertilisers will be imported from the neighbouring countries. This will result in losses worth thousands of crores of rupees for the Indian fertiliser companies..... Therefore, it will be prudent to peg gas prices with the Middle East countries, Indonesia and Malaysia.

When to increase gas prices?
Today, industries in Maharashtra are suffering from double hammering. One, from already high gas prices (between 80 per cent to three hundred per cent higher than neighbouring countries). Two, shortage of availability i.e. Based on Bombay High gas at Uran the whole of Maharashtra is experiencing a 40 per cent to 50 per cent cut in availability of gas. These industries in Maharashtra are required to run their capital- intensive plants below 60 per cent of installed capacity making them uneconomical and uncompetitive. Gas price increase can only be acceptable if availability is simultaneously assured.

Solution
The best solution, then, would be to increase the gas prices when LNG imports have been organised to ensure that at least plant operations are running at optimum capacity. LNG, either through Petronet Dahej or through Dabhol Power Company is not expected is to be available in Maharashtra before year 2004. Hence, any increase in prices of gas prior to this will ensure closure of industries and the very need for LNG may disappear in the near future. At present the prices of imported fertiliser maybe cheaper than indigenously produced fertilisers. But, vanishing production capacity as a result of closure of local industries will invite the danger of foreign players forming a cartel to jack up prices. Consequently, the country will be left with no choice than to import. This will result in fertiliser becoming unaffordable to local farmers and government will have to shell out precious foreign exchange.