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Counterproductive decision on natural gas price in India

| by N.S.Venkataraman

( April 13, 2014, Colombo, Sri Lanka Guardian) Rangarajan panel was appointed by Government of India to recommend appropriate policies for determining the price of natural gas in India. Subsequent to the submission of recommendation, Government of India issued notification accepting the recommendation of Rangarajan panel and for implementing it from 1st April 2014.

However, the Election Commission differed the implementation until the completion of parliamentary election.

Implementation of recommendation of Rangarajan panel would result in almost doubling of the natural gas price in India.

The panel suggested new formula for natural gas price that would be applicable till March 31st, 2019. The rates would change every quarter based on twelve months average of global rates and LNG imported prices with a lag of one quarter.

This recommendation is causing considerable concern amongst the natural gas consumers such as urea fertilizer units and power projects.

Cost push inflation :

The notification would result in near doubling of the natural gas price immediately, that would contribute to steep increase in the cost of production of urea fertiliser and power produced from natural gas. The increase in cost of production of urea would lead to additional subsidy burden for the government to the extent of not less than Rupees ten thousand crores per annum. The price of power will have to increase considerably, that will have adverse multiplying effect in the national economy and result in serious problems of cost push inflation.

Wishful expectation :

The major justification provided for the notification that would result in steep increase in the price of natural gas was , that it would be necessary to provide adequate incentive to the gas exploration companies to take greater efforts to find the gas and boost the domestic gas production. However, this is a wishful expectation, as mere gas price increase by itself will not result in increased production of gas, as there are number of technical issues involved in gas exploration and production.

Indian gas exploration efforts in the past have not been satisfactory ,which has not been due to the price factors. Out of 254 blocks awarded for gas exploration to various companies since 1999 under NELP scheme , only three blocks have been successful and even in these blocks ,the production of natural gas has not been prolific. In the case of the KG basin, the production has drastically come down from around 60 mmscmd to around 14 mmscmd due to technical problems such as water and sand ingress.

Considering the past experience in gas exploration, it is extremely difficult to be highly optimistic about the future production prospects of gas whatever may be the price offered to the producers and one’s fingers have to be kept crossed.

Indian gas production trend :

Even with the present price of around USD 4.2 per mmBtu , the production of natural gas has been increasing at around 3.8% per annum on an average during the last ten years.

Such production increase has been largely due to the efforts and contribution of public sector organisation like ONGC. The efforts of ONGC would continue and ONGC has not incurred loss in the past in its gas exploration efforts.

Demand for natural gas :

Several urea fertiliser plants are now facing natural gas shortage and are using costly substitute such as naphtha feedstock. Indian urea production is now stagnant at around 22 million tonnes per annum and no urea project has been set up in the country for the last twelve years.

Around 9000 MW of natural gas based power projects, involving an investment of around Rs.50,000 crores, are now stranded due to want of natural gas.

While such is the demand trend for natural gas, India is taking steps to meet the natural gas shortage by importing liquefied natural gas (LNG).

Globally, natural gas supply scenario is comfortable due to the huge production of shale gas in USA. In the coming years, the supply scenario for natural gas is likely to remain comfortable and price stability is expected . Therefore, India can have the option of importing natural gas to the extent needed.

Need to reduce the demand for natural gas :

There are excellent prospects for reducing the demand for natural gas in the country by opting for off shore wind power projects in a big way. India can set up off shore wind power projects of capacity one lakh megawatt along its 7000 kilometre long coastal line. European union has shown the way.

There are great prospects for algae biofuel projects in India, where biofuel , methane gas / power can be produced in a big way. US and other developed countries are now showing the way.

There are possibilities of setting up coal gasification projects to produce coal gas for use as substitute for natural gas. China has shown the way.

There are also possibilities of optimising and stabilising the consumption of urea in the country nearly at the present level by improving agricultural productivity and bio fertilisers can also be promoted in a big way.

What will the next government do ?

An investigative and well researched book has been now edited by Mr. Swaminathan Venkataraman, a chemical engineer and MBA from Indian institute of Management, Ahmedabad and Director of Nandini Consultancy Centre, Singapore on the gas price revision issues in India. The author strongly stresses the need for reconsidering the recommendation of Rangarajan panel. The author concludes that government’s notification accepting the recommendation of Rangarajan Panel would lead to disastrous consequences , as it would result in huge increase in subsidy burden, cost push inflation and with no guarantee that the natural gas production would really be stepped up.

There is expectation in India that the next government would carefully review the notification issued by government of India on natural gas price. It is necessary that the perspective and apprehension of the consumers should be carefully examined by the next government to be formed after the parliamentary election , so that the interests of the national economy would not suffer due to this counter productive decision.

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