Gas price hike: You lose, they gain?

Jun 28, 2013

In this issue:
» Trouble looming for India's PSU banks
» Global retail chains see political hurdles in India
» Is there a case for a solid rally in gold prices?
» The need for a strong price determining mechanism...
» ...and more!

The big news today is that the UPA government has approved the doubling of domestic natural gas prices. From US$ 4.2 per million metric British thermal units (mmBtu), the domestic gas price will rise to US$ 8.4-8.5 per mmBtu starting April 2014.

What has been the trigger to this price hike? Domestic gas output has been declining since November 2010. This has created a significant demand-supply mismatch. It was said that the existing price ceiling had made production ramp up unviable. As such, the move is expected to bring in more investments in the sector and boost India's gas production. The expected boost in domestic gas production would in turn ease the supply shortages to major consumers of gas such as power and fertiliser sector. Over the long term, it could help lower India's dependence on expensive imported fuel. Currently, India imports three-fourths of its energy requirements. This weighs heavily on our current account balance and fuel subsidy bill.

Who are going to be the biggest beneficiaries of this move? The answer is natural gas producers such as Reliance Industries Ltd (RIL), Oil & Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), among others. It is worth noting that these three firms together account for over 85% of the domestic natural gas production with RIL operating India's largest gas field.

It is also worth questioning what the impact would be on Indian consumers and government finances. As per a Cabinet Committee on Economic Affairs (CCEA) note (as reported in Business Standard), every US dollar rise in natural gas price would result in incremental state revenue of about Rs 7.1 bn. On the other hand, the annual subsidy loss on fertilisers would be about Rs 31.6 bn. The losses for the power sector would also increase by about Rs 100.4 bn annually. And this could push up electricity tariffs for consumers substantially. On the whole, the impact of the gas price hike for Indian consumers, farmers and government finances would be negative.

All in all, Reliance Industries is likely to be one of the key beneficiaries of the gas price hike. Is this pure coincidence? Or has the government sacrificed the interests of the nation for the benefit of a giant private conglomerate?

Certain events do suggest a lack of total transparency in the overall scheme of things. For one, the Comptroller and Auditor General (CAG) Draft Report had alleged an unholy nexus between the UPA government and private businesses pertaining to production sharing contracts for gas blocks. As an article in Business Today suggests, far from being penalised for not delivering the promised gas output, RIL kept increasing capital expenditure. And this resulted in revenue losses to the government. CAG had raised suspicions alleging that the expenses were gold plated. Moreover, there have been off-the-record allegations that the cut down in gas production was deliberate in view of the gas pricing review coming up in 2014, and not due to tough geology in KG D6 as cited by RIL. In view of all this, ideally the company should have been forced to give up its stake in the gas block and fresh bids should have been invited. Instead, it seems the government has been bending rules to accommodate the company's interests.

In addition, Union Cabinet Minister Jaipal Reddy who had been assigned the Petroleum and Natural Gas ministry in January 2011 was mysteriously shifted to another ministry in October 2012. It must be noted that Mr Reddy had taken a firm stand against RIL and refused to bend rules. During his stint, many big-ticket RIL proposals were stuck at the ministry (as per Business Today). As a result, Mr Reddy's transfer to another ministry gave a strong hint of vested interested turning the wheels.

In conclusion, the gas price hike does seem to have merits for India's long term energy security and economic prospects. However, the move is likely to add further upward pressure on inflation and fiscal deficit in the medium term.

According to you, is the hike in natural gas prices a case of private gains and public losses? Please share your comments or post them on our Facebook page / Google+ page

------- How we picked stocks that gave Double and even TRIPLE digit returns (Just 4 days to go!) -------

Our Research team has authored our latest e-learning course - Equitymaster's Secrets.

A course that will teach you everything we've learnt about picking out money-making stocks over the past 17 years.

The first lecture is being released in just 4 days and more 1,000 Investors have already booked their seats.

Now, we don't want you to miss out on this rare opportunity...

So, if you've not gone through the details yet, here's an urgent reminder.

Click Here to watch a short video for full details.

 Chart of the day
For those hoping to see some signs of recovery in economic data there is bad news. The latest Financial Stability Report released by the Reserve Bank of India (RBI) has some stern warning signs. The central bank has not minced words with regard to the possibility of asset quality in Indian banking sector going from bad to worse!

At the end of March 2013 the gross NPAs in the sector stood at already steep level of 3.4%. This is expected to inch up to 3.8% by September 2013. By the end of FY14, in a worst case scenario, the gross NPA levels could go up to 4.4%! A level that was earlier seen only a decade back... The chart of the day shows the aggregate net NPAs of public sector banks.

Construction and agriculture, followed by iron and steel sectors will be the main contributor to bad loans. The RBI has therefore warned depositors and investors to brace for substantial volatility in the sector. Since the choice is limited, depositors and investors need to be very cautious about the entity they bank with or invest in.

Data source: DNA

The government made a landmark decision last year when it approved 51% FDI (Foreign Direct Investment) in retail. But for those who thought that are cities would soon have 'Walmarts' and 'Tescos' opening up their stores, they need to wait. The international retail chains are in no hurry to enter India. The reason for their reluctance is our political scenario. The ruling government had faced a lot of opposition when it had tried to clear the FDI decision. Though the decision was subsequently approved, nevertheless it still faced criticism from other parties. One of its allies decided to withdraw their support to the government. As such only 12 out of India's 28 states have given their support for this policy. No guess that these are the states that are governed by the Congress, which is currently the ruling party in the country. As a result, most retailers are wary that if things took a turn in the upcoming elections, then their investments in the country would come under threat. This is why they have repeatedly urged the government to bring about more clarity on their ruling. This is exactly what we have been stressing upon for quite some time. The government has to be clear when it comes to policy reforms. Merely passing an order and then going back on it and then passing it again just to have it revoked when the power changes hand, gives no confidence to anyone. Least of all to investors!

After the stupendous rally in gold in the last decade, the precious metal has seen prices falling considerably since early this year. Some would take this as an indication that an economic recovery has started taking place. Because stock markets have been performing well, investors have been looking to put in their money there. Besides there is the perception is that the worse of the global financial crisis is now behind us.

The fact that the Fed is also indicating withdrawal of its QE program means that things are finally looking up for the economy. So why invest in gold? But as per an article in Business Insider, Euro Pacific Capital's Peter Schiff thinks otherwise. He believes that gold is on the verge of the biggest rally ever. Even if he does not know when it is going to start.

First, gold is currently selling below the cost of production. Thus, mining companies will not invest in capex until gold prices rise to levels of around US$ 2500 to US$ 3000. This would lead to a shortage in gold supply consequently pushing prices higher. Second, the assumption that there is an economic recovery taking shape also seems suspect. It is all very well for the Fed to state that it intends to withdraw QE. But this is not as simple as it seems. So far the rally in financial markets has largely been the result of steroids doled out by the Fed. Therefore, withdrawing these will lead to a bigger crash in the markets. Thus, the Fed may not really hope to achieve the smooth exit it has envisaged. So as long as the money printing presses continue to run, gold will find takers. Well, we can't help but agree with the points that Schiff has made.

Establishing accurate prices for assets is absolutely essential to a well functioning capital market. Without correct prices, investors would pick up all the wrong signals. And this could seriously impact how savings and resources are distributed in an economy. Thus, it is very important that there exists a strong price determining mechanism. An article in a leading daily does give an interesting twist to this mechanism. It argues that while it is the Government that decides the risk free rate, the appropriate risk premium is indeed decided by the markets.

For emerging economies like India and China though, there isn't as good an infrastructure in place to decide the risk premium as it is in developed markets. Besides, they suffer from a peculiar problem. They of course need to bring in more market oriented reforms if they need to maintain economic development. But bringing in reforms at a time where price discovery mechanism is not perfect or where prices are not efficient could lead to asset bubbles in these nations. Since asset bubble is a bigger threat for these countries, they will be better off improving the existing infrastructure and ensure robust price discovery mechanism as per us.

In the meanwhile Indian stock markets have extended their rally. At the time of writing, the benchmark BSE-Sensex was up by 475 points (2.5%). capital goods and Metal stocks were leading the rally. Information Technology and Consumer Durable stocks were the biggest losers. All Asian stock markets were trading higher led by Japan and Hong Kong.

 Today's investing mantra
"If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored."- Peter Lynch

Today's Premium Edition.

Today being a Saturday, there is no Premium edition being published.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "Gas price hike: You lose, they gain?". Click here!

16 Responses to "Gas price hike: You lose, they gain?"

M M Asrani

May 2, 2014

Gas price being a key parameter in fertilizer & Power generation plant is beyond doubt going to effect one & all. That also not a hike but doubling the price is totally unjust .


Mohan Lal

Apr 7, 2014

India is very much hunger of gas and a key for the development of the people and the industry. RIL should not be allowed and give a free hand to screw on gas price. A technical team having no fear and favour should study, find the cost of the exploration and supply, plus 5 to 6% profit and arrive the sale price.Rather two committee should work together and care is to be taken that the comittee is not enflluence by RIL. Thus arrive the true gas price to take the country farword.


Ramesh Jaradhara

Jul 1, 2013

Hike of gas prices will definitely impact the common people badly. The motive behind gas price hike is to benefit companies like RIL, not the govt. The transfer of Mr. Reddy from petroleum portfolio is an act of behind the curtain episode staged at PMO.



Jun 30, 2013



Jayanth T.S.

Jun 29, 2013

This is not new to RIL. Go back to history. Congress Govt had framed the rules/polices in line with the requirement RIL even on those days during Dhiru Bhais time also. Only thing is you need to dig up the history.


VInay Joshi

Jun 29, 2013

As expected government finally succumbed to RIL pressure tactics.
RIL had the guts to reduce gas output and hold the nation to ransom by holding national resource for its petty gains while the government looked helpless.
It is surprising that the same congress party had a prime minister who under similar circumstances would have abrogated the contract and if not possible would have nationalized the resourced but would not have succumbed to such tactics.


v v rao

Jun 29, 2013

your opinions expressed on the gas price hike have been illogical and negative attitude towards government decision.
you must think in a clear picture. Certainly, the writer has not having clear idea about the exploration business. We just cannot kill our PSus for long time without any development and can not be charitable institutions. The gas prices should be nearer to international price. We do not have technology to explore these deep water resources and no MNC will come to join until the rates are competetive. Just ask the government to subsidise. We can not just expect to get power at the rate of Rs 2/unit. we should not involve politics in this issue. The editor should undertake a tour in indian trains and how people are spending. Everybody is purchasing minieral water including street vendors. All subsidies should be borne by the government directly and should not kill our PSUs. I advise the editor to write articles without any bias and impartial attitude.


Muraly Sekar

Jun 29, 2013

It is the biggest scam of all. RIL deliberately cut down Gas production over the past few years, because of which the key sectors like Fertilizer (natural gas is an exact alternative for the currently used costly fuel (Naptha) which could have brought down the production cost and subsequently bring down the fertilizer subsidy), Power (as much as 10,000 to 12,000 Mw of gas based power projects didn’t kick started and billions of investments become non-productive due to non-availability of Gas) and other vital gas utilization projects didn’t take of and made every Indian suffer. All of this is for the benefit of RIL, this is another major scam the loss created by this will be much bigger than the scams like 2G spectrum and Coal block.


Sundaravaradan S

Jun 28, 2013

1. One Reader clearly points-out that the Indian Govt's Gas Price is much less than international price. How long one can keep the Gas price artificially down? Why will anybody will do the exploration for uneconomic compensation?

2.Which Indian Minister current or future honestly bothers for Public-interest (Vs. Self Interest)?

Let Indian Govt.go ahead with Policy reforms, first.



Jun 28, 2013

Commodity prices should be governed by the open market. Intervention does not actually help. But what is interesting is that in another 3-6 months Reliance will all of a sudden start discovering new gas blocks!

Equitymaster requests your view! Post a comment on "Gas price hike: You lose, they gain?". Click here!