Gas prices: Is there a better option?

Fri, 19 Jul Pre-Open

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The government's acceptance of the Rangarajan Committee's new gas prices at US$ 6.8 per unit (as later clarified by the Oil Ministry) from next fiscal onwards has started a fresh round of debate. Many are of the view that pricing the fuel higher would make sense as it would make the sector more attractive. This would eventually lead to global investors pumping in capital and bringing in newer and better technology for exploration, thereby making India less reliant on importing its energy requirements. It may be noted that currently, India imports three-fourths of its energy requirements. As such, this development could help the government curb the trade deficit - a situation that arises when its imports exceed its exports - as well as fuel subsidy bill.

On the other hand, there are people opposing this move. Naturally, as it would increase their costs. These include gas users such as fertilizer and power sector. Some also believe that this development extends unjustifiable favors to Reliance Industries that is operating India's largest gas field.

The pricing this time around, as done earlier when it was set at US$ 4.2 per unit, seems to be done on an arbitrary basis (although to a lesser extent) and deviates from the commitment under the New Exploration Licensing Policy (NELP) contracts. It is important to note here that the contracts as per NELP provide for market-determined gas prices through competitive bidding on an arm's length basis. While prices need to be higher to make the sector more attractive, there is no guarantee that the move will ensure higher investments. Fixing gas prices in this manner ignores exploration costs and returns on investment - the key factors that decide the viability and attractiveness of any sector. The government should instead make sure the contracts that it has drawn in the past are honored and in case they are not, the defaulting party gets penalized. After all, it is a natural resource of critical importance in question.

We believe that a complete free price regime for gas at this stage would escalate prices given that demand outstrips production. Also, since the segment is still at its nascent stage in India, with not many players involved, market cartelization is a development that cannot be ruled out in the future as and when private participation increases. Especially given that this is a natural resource which is essential for meeting India's energy needs. We believe that moving away from the profit-sharing model to a revenue-sharing one, awarding contracts on return on investment criteria and ensuring that the players abide by contracts are some of the steps that can help this sector develop and avoid controversies.