Pricing regulation faulty, says S&P’s; needs a relook if domestic oil & gas zone has to revitalise and fuel Make In India

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The rebate in prices of CNG (compressed healthy gas) and PNG (piped healthy gas) with outcome from Oct 1 competence have warmed a hearts of a sell consumers, though a design for a oil and gas industry, led by PSU behemoth ONGC, is distant from pretty.

For, on a same day, a supervision effected a really high cut of 18%, a steepest in fact, in a prices paid to gas producers on net calorific value (NCV) from $5.18 per mmBtu (million metric British thermal units) to $4.24 mmBtu from Oct 1, 2015 to Mar 31, 2016.

Government-controlled gas prices in India are already proceed next a prices in a Asia-Pacific segment countries with allied levels of growth of domestic gas sector. With this high cut, a cost paid for gas in India will be about half of that in Thailand ($8.2) and rebate than half of Philippines ($11) and Indonesia ($10.5).

Representational image. Reuters Representational image. Reuters

Representational image. Reuters

According to a Standard Poor’s report, also expelled on Oct 1, this blow will land rather tough on Indian gas industry’s ability and ardour to make investments in a sector. Particularly so since a attention has been grieving for some years now and has been clamouring for a satisfactory pricing regulation that creates building scarcely 10 TCF (trillion cubic feet) of detected gas pot viable. A satisfactory pricing formula, a attention has been goading a Ministry of Petroleum and Natural Gas (MoPNG), is essential for it to dedicate investments for EP (exploration and production) in low sea and ultra low sea waters of a Krishan-Godavari dish to give a boost to domestic production. (Currently India imports scarcely 85% of gas consumed.)

While private operators such as Reliance Industries (which is not impacted by this cost dump since it is anyway authorised usually $4.24 per mmBtu) will secrete investments, PSU vital ONGC, that is mandated to rise India’s domestic sector, will have no choice though to insist with a Rs 40,000 crore investment in low sea and ultra low sea projects. This, says SP’s, will harm a profitability even more. That’s not all, the news says this cost rebate alone will cost a Government of India about Rs 600 crore in mislaid royalties and afterwards some some-more in taxes.

So, what seems to be a problem? If a conditions does not assistance a operators, a government, a end-users (in a prolonged term) and a country, since are we stranded where we are? Why has a attention been handed down a high cut in prices when it has been arguing for a opposite? Is it to do with a acrobatics prices of wanton globally? Is a Indian attention creation a strain and dance of a tellurian attention meltdown? Is it seeking to be treated with child gloves?

Global trends competence be a trigger for a present cut in prices, no doubt, though a problem is some-more elemental and singly Indian. SP’s news addressed this singular problem in one revelation paragraph. The tellurian stage is what it is for everybody but, it says, Indian attention is saddled with a pricing regulation whose really basement is questionable:

“The regulation for pricing domestic gas considers prices in gas-surplus geographies such as a U.S. and Canada, that have grown gas transportation infrastructure. Given India’s gas prolongation necessity and emerging gas ride infrastructure, comparing prices in identical geographies will be some-more relevant, in a opinion. Gas prices in India are revoke than in its informal peers as well. For example, healthy gas prices in Thailand and Indonesia normal US$8-US$10 per mmBtu.”

To be sure, SP’s is not throwing a baby with a bath water. “We trust a government’s devise to kindle private zone appearance and move in clarity in gas pricing by introducing formula-driven gas pricing is good intended,” it says suggesting, therefore, that a proceed for a formula-based pricing is right, though a regulation arrived during is not.

The proceed brazen afterwards is transparent as daylight. If India has to boost a domestic gas prolongation and revoke imports, this curiosity in pricing contingency be bound by basing it on a cost movements in gas necessity economies rather than gas over-abundance ones. Failure to do so will land India in a spicy conditions of exceedingly undermining a Prime Minister’s desirous Make In India goal while during a same time pushing investments in unfamiliar countries to a balance of scarcely $100 billion.

To know where this figure is entrance from, we only have to take a cursory demeanour during a 9 long-term contracts to import LNG (liquified healthy gas) that India has recently entered into with several unfamiliar producers. The normal cost for gas in these contracts is $10 mmBtu. (Remember, for domestic companies this is only $4.24 mmBtu.)

This means, a republic will bombard out Rs 65,000 crore each year for imports during this cost rope and will finish adult profitable scarcely Rs 14 lakh crore by a time these dear contracts expire.

Indian oil and gas companies have quacked themselves hoarse that if given a identical cost they can develop potential of around 10 TCF of domestic gas pot valued during Rs. 6.6 lakh crores ($100 billion). But no, they will get only $4.24 since of a pricing regulation that pitches gas and gas infrastructure-deficient India with those of gas over-abundance countries carrying glorious gas travel infrastructure.

It is not tough to predict that if domestic companies (or unfamiliar companies operative in India) are paid a identical contractual cost of $10, a estimated income in a form of royalty, cess, share in eminence petroleum and corporate taxes to a Government of India will volume to Rs 2-2.5 lakh crores ($30-40 billion).

What’s more, it will move in a identical volume in investments into India rather than send a investments into the LNG exporting countries. LNG imports will be transposed by domestically constructed gas heading to estimable saving of unfamiliar exchange. This income will sojourn within a republic and coax a Indian banking system. Domestic prolongation of gas will directly boost GDP of a republic and will have a multiplier outcome in terms of practice era opposite a country.

At this price, investment in domestic oil and gas attention will start to flow as all PSU and private players will be speedy to start building gas reserves. This will coax activity in a indolent EP sector. And scold a imbalance in India’s appetite expenditure patterns that is badly lopsided in foster of imports.

If prices continue to be artificially vexed in India, we will continue to sojourn contingent on alien appetite (LNG) with a unfamiliar sell outgo that will serve boost by $100 billion. This will keep a vigour on a Indian rupee creation imports even some-more costly.

But if India can realize a definite intensity for domestic production, the kind of savings from reduced imports and appendage revenue, finished in only one process decision, can, only for a comparison, give us a income to build open toilets in all of India’s 6,38,000 villages!

There’s a splinter of hope, however. The supervision has recently authorised a marketplace cost for building 69 smaller oil and gas fields. What it now needs to do is to junk this forced eminence between tiny and big, domestic and unfamiliar and extend a satisfactory and viable pricing for all.

Because, when domestic companies are subjected to astray cost discriminations, a republic also hurts equally.

(Disclosure: Firstpost is partial of Network18 Media Investment Limited that is owned by Reliance Industries Limited.)