Energy: Will there be complete decontrol? - Views on News from Equitymaster

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Energy: Will there be complete decontrol?

Dec 19, 2001

With many betting on gas consumption in the country to increase, activity, especially on the policy front seems to be heating up. Expected dismantling of the administered pricing mechanism (APM) in April 2002 is likely to result in policy changes for the gas sector as well. With complete deregulation of the hydrocarbon sector many believe that gas prices should also be de-controlled. The Government, primarily the Ministry of Petroleum & Natural Gas (MoPNG) and Finance Ministry are in discussion to roll out a suitable policy for the gas sector post deregulation. Currently, the discussion seems to be in stalemate, as the Petroleum Ministry favours 100% linking of domestic gas prices to international parity rates. Finance Ministry, on the other hand, is of the opinion that prices should be increased by Rs 600 per annum for the next five years. By then, the Finance Ministry reckons that domestic prices would have caught up with international prices.

Gas prices are generally linked to a basket of fuel oil. At current rates, the international price of gas is an estimated Rs 3,950 / thousand standard cubic meters (tscm). Over the past three years, linkage of domestic gas prices to import parity has increased from 55% in 1998 to 75% in 2000. Under the current mechanism domestic prices should be approximately Rs 2,960 / tscm. However, the pricing mechanism also has a cap at Rs 2,850 / tscm. Prices in Northeastern states are even lower in order to encourage industrial activity in the region.

Raising of linkage rates to 100% will result in a significant jump in domestic gas prices. The energy source is feedstock for a couple of sensitive sectors -- fertilisers and power -- that are the largest consumers. The two sectors combined constitute 75% of gas consumption. Both sectors offer heavy subsidy to the end user. Consequently, increase in feedstock prices could ring the death knell for the industry and/or significantly increase the Government subsidy bill, which is already playing havoc with finances. The concerned ministries are likely to reach a compromise on the current impasse.

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