Ready reckoner on the KG D6 gas basin controversy
Shishir Asthana | Mumbai
February 12, 2014
Reacting to Arvind Kejriwal’s presser where he said that an FIR will be filed against Mukesh Ambani, current oil minister Veerappa Moily and former oil minister Murli Deora over the gas pricing formula, Moily said that we should sympathize with his ignorance since kejriwal doesn’t know how the government functions. He reiterated that the norms were being followed and there is a system for fixing prices.
So who is actually ignorant in this case? Were the norms actually followed or has Kejriwal raised some valid points.
Here is a refresher and ready reckoner on the entire KG D6 gas basin controversy.
1) What is KG D6 basin?
Krishna Godavari (KG) Basin is spread across 50,000 sq km in the Krishna River and Godavari river basins near the coast of Andhra Pradesh. The site Dhirubhai-6 (D6) is where Reliance Industries discovered the biggest gas reserves in India. In government records, the 7,645 sq km block is known as KG-DWN-98/1. The KG basin is considered to be the largest natural gas basin in India.
2) How did Reliance Industries get into KG basin?
Government of India opened up hydrocarbon exploration and production (E&P) in the country to private and foreign players in 1991. Small and medium sized blocks were opened up in this round which was followed up by giving out bigger blocks in 1999 as per the New Exploration and Licensing Policy (NELP). Through NELP, Reliance bagged the rights to explore the D6 block.
3) Did government have a role after the block was handed over?
Since all mining resources belong to the people of India, government monitors the exploration and production of these. In the case of oil and gas sector, government enters into contractual relationship with the private player through a Production Sharing Contract (PSC). The PSC lays out roles and responsibilities of all parties, specifies the detailed procedures to be followed at different stages of exploration, development and production. It also specifies the cost recovery and profit sharing in the contract. Directorate General of Hydrocarbon (DGH) monitors the PSC. A PSC was signed between the government of India (GOI) and undivided Reliance Industries and its minority partner Niko Resources (10 per cent stake) for exploration and production of oil and gas.
4) What happened to KG D6 when the Reliance group split?
Even before production could start from the KG D6 wells, Reliance group was split vertically between the two brothers, with the gas business of Reliance Industries remaining with Mukesh Ambani, the elder brother. The brothers fought over this huge reserve of gas even though it was not theirs in the first place. The very first line of a production sharing contract clearly says that “By virtue of article 297 of the Constitution of India, Petroleum is a natural state in the territorial waters and the continental shelf of India is vested with the Union of India”.
The brothers while splitting their father’s empire split the gas reserves too. A family pact between the two brothers, which was never made public till the issue blew out of proportion, was at the core of the dispute. Anil Ambani owned RNRL (Reliance Natural Resources Ltd) citing the agreement by the brothers in 2005, claimed it had rights to gas from Reliance KG basin for 17 years at $2.34 per mmBtu (million British thermal unit).The Supreme Court finally settled the matter by saying that ‘the government owns the gas till it reaches its ultimate consumer and parties must restrict their negotiation within the conditions of the government policy’.
Here the role of the government needs to be highlighted. None of the ministries involved in the process, including the oil ministry which Moily now represents, raised the point that the gas reserves belonged to the country and was not a property of the Ambani family. Even the Prime Minister, ManMohan Singh meekly requested the brothers to settle their differences in the interests of the country.
But how did the Ambani brothers arrive at this magic figure of $2.34 per mmBtu when there was no benchmark. In fact ONGC was supplying gas to the government at half the rate.
5) How did Anil Ambani arrive at the price of $2.34 per mmBtu for KG basin gas?
In June 2004, National Thermal Power Corporation (NTPC) invited bids for supply of gas for its 2600 MW power plant in Kawas and Gandhar. Reliance Industries, hopeful of starting production of gas by the time NTPC’s power plant is ready bid for the project and was awarded it as the lowest ‘techno-commercial’ bidder. A Letter of Intent (LOI) was issued to Reliance Industries to supply 132 trillion units of gas per annum to NTPC for 17 years at a price of $2.34 per mmBtu. Anil Ambani used this as a basis for asking gas for his power plant.
6) Why is the NTPC-Reliance dispute all about?
Reliance Industries refused to sign the contract for supply of gas. Jairam Ramesh, the Minister of Power in a written reply to a question in Lok Sabha in 2009 said that “After issuance of LOI, RIL did not come forward to sign the Gas Sale and Purchase Agreement and sought major changes in the draft GSPA.In spite of all the efforts (by NTPC) RIL did not sign the GSPA agreed during the bidding process.”
NTPC dragged Reliance to Bombay High Court on December 20, 2005 but unfortunately the case that has dragged on. The case after nine years is still sub judice. Here again the government's disinterest in protecting the interests of its own PSU has been a matter of much debate.
While NTPC was fighting the case with Reliance in the Bombay High Court, the government referred the matter to an Empowered Group of Ministers (EGoM) in 2007 headed by none other than the current President Pranab Mukherjee, who was then the finance minister. EGoM approved a rate hike of $4.2 per mmBtu of gas. This decision was taken without a single unit of gas coming out of the KG basin.
Reliance grabbed at this opportunity and said that it could not supply gas at a price lower than the mandated price set by the government.
7) How did Pranab Mukherjee arrive at the price of $4.2 mmBtu for gas?
The price was arrived by Reliance through its ‘price discovery mechanism’. As per a Reliance crafter formula, user companies were asked to quote a price which gave them a choice of arriving at a value between $4.54 and $4.75 per mmBtu. Reliance initially forwarded a figure of $4.59 which was later brought down to $4.3, but Pranab Mukherjee claimed victory by announcing a figure of $4.2 per mmBtu.
The brazenness of the entire exercise by the government can be seen from the fact that the objections raised by the Principal Advisor, Power and Energy to the government of India, Surya P Sethi along with the then cabinet secretary were ignored by the government. Surya questions the recommendation saying that nowhere is the cost of production more than $1.43.
8) Is it exploration or exploitation?
A CAG report released in 2011 (initiated in 2007 but delayed due to non-co-operation) on Performance Audit of Hydrocarbon PSCs castigated the oil ministry along with Reliance to retain its entire KG-D6 block in contravention of the PSC. As per the PSC, Reliance should have relinquished 25 per cent of the total area outside the discoveries in 2004 and 2005, but the entire area was declared as a discovery area (after initial objections) and the company was allowed to retain it. Without drilling adequate wells, Reliance kept on claiming that there was potential for petroleum. In CAG’s words this was done to confuse potential/prospectivity with actual discovery of hydrocarbons. The move allowed Reliance to keep the entire area to itself without following the norms laid under the PSC.
In a recent report CAG has said that Reliance moved directly from discovery to commercial production, skipping the intermediate appraisal programme step required as under PSC. CAG asks, without an appraisal programme how did the government and DGH ascertain the amount of gas in the well? And if they did not know how much gas was there in the well, what is the logic and basis of blaming Reliance of hoarding gas. Further, as pointed out by CAG, how did DGH assure itself of reliability of the development plan, production rate and production costs without the appraisal report?
9) Why more investments are bad?
CAG pointed out that as per the PSC, more investments, especially in initial stages would mean more profit for the operator and less for the government. This structure gives inadequate incentive for operators to reduce capital expenditure and provides them with substantial incentives to ‘front-end’ capital expenditure. Share of government profit varies from 85 per cent in a low investment scenario to 5 per cent in a high investment scenario. This explains the case of exaggerated investment made against Reliance Industries.
Incidentally, as pointed out by V Ranganathan of IIM Bangalore in his article in Economic Times, the case of exaggerated investment was first pointed out by Anil Ambani, where he pointed out that investment as per Reliance’s plan is increasing four times but production is expected to only double. Reliance revised its production estimates from 40 mmscmd (million metric standard cubic metres per day) to 80 mmscmd while increasing its investment from $2.4 billion to $8.8 billion.
10) How was the new pricing formula arrived at?
Former RBI governor C Rangarajan came out with a formula which has been followed nowhere in the world, which has resulted in Reliance (and other players too) getting a price on import parity basis. Surya Sethi, former Principal Adviser, Power and Energy, Government of India does not mince words when he asks the Prime Minister in an open letter [Read here] not to burden the nation with Rangarajan Committee’s madness that only benefit a select few.
Conclusion
Sethi’s open letter to the Prime Minister sums up the entire issue when he points out that the CAG’s findings reveal how crony capitalism benefited RIL. The pre-qualification norms were diluted to ensure RIL qualified, the claimed size of gas discoveries, the field development plans and the investment outlays proposed escaped rigorous due diligence says Sethi. Above all, the company’s commitments under the PSC on gas output were not enforced.
The entire episode stinks of anything but natural gas. While Moily may claim that system was followed, there is enough evidence out there that says otherwise.
http://www.business-standard.com/article/companies/10-things-you-should-know-about-the-reliance-kg-d6-gas-deal-114021200357_1.html
February 12, 2014
Reacting to Arvind Kejriwal’s presser where he said that an FIR will be filed against Mukesh Ambani, current oil minister Veerappa Moily and former oil minister Murli Deora over the gas pricing formula, Moily said that we should sympathize with his ignorance since kejriwal doesn’t know how the government functions. He reiterated that the norms were being followed and there is a system for fixing prices.
So who is actually ignorant in this case? Were the norms actually followed or has Kejriwal raised some valid points.
Here is a refresher and ready reckoner on the entire KG D6 gas basin controversy.
1) What is KG D6 basin?
Krishna Godavari (KG) Basin is spread across 50,000 sq km in the Krishna River and Godavari river basins near the coast of Andhra Pradesh. The site Dhirubhai-6 (D6) is where Reliance Industries discovered the biggest gas reserves in India. In government records, the 7,645 sq km block is known as KG-DWN-98/1. The KG basin is considered to be the largest natural gas basin in India.
2) How did Reliance Industries get into KG basin?
Government of India opened up hydrocarbon exploration and production (E&P) in the country to private and foreign players in 1991. Small and medium sized blocks were opened up in this round which was followed up by giving out bigger blocks in 1999 as per the New Exploration and Licensing Policy (NELP). Through NELP, Reliance bagged the rights to explore the D6 block.
3) Did government have a role after the block was handed over?
Since all mining resources belong to the people of India, government monitors the exploration and production of these. In the case of oil and gas sector, government enters into contractual relationship with the private player through a Production Sharing Contract (PSC). The PSC lays out roles and responsibilities of all parties, specifies the detailed procedures to be followed at different stages of exploration, development and production. It also specifies the cost recovery and profit sharing in the contract. Directorate General of Hydrocarbon (DGH) monitors the PSC. A PSC was signed between the government of India (GOI) and undivided Reliance Industries and its minority partner Niko Resources (10 per cent stake) for exploration and production of oil and gas.
4) What happened to KG D6 when the Reliance group split?
Even before production could start from the KG D6 wells, Reliance group was split vertically between the two brothers, with the gas business of Reliance Industries remaining with Mukesh Ambani, the elder brother. The brothers fought over this huge reserve of gas even though it was not theirs in the first place. The very first line of a production sharing contract clearly says that “By virtue of article 297 of the Constitution of India, Petroleum is a natural state in the territorial waters and the continental shelf of India is vested with the Union of India”.
The brothers while splitting their father’s empire split the gas reserves too. A family pact between the two brothers, which was never made public till the issue blew out of proportion, was at the core of the dispute. Anil Ambani owned RNRL (Reliance Natural Resources Ltd) citing the agreement by the brothers in 2005, claimed it had rights to gas from Reliance KG basin for 17 years at $2.34 per mmBtu (million British thermal unit).The Supreme Court finally settled the matter by saying that ‘the government owns the gas till it reaches its ultimate consumer and parties must restrict their negotiation within the conditions of the government policy’.
Here the role of the government needs to be highlighted. None of the ministries involved in the process, including the oil ministry which Moily now represents, raised the point that the gas reserves belonged to the country and was not a property of the Ambani family. Even the Prime Minister, ManMohan Singh meekly requested the brothers to settle their differences in the interests of the country.
But how did the Ambani brothers arrive at this magic figure of $2.34 per mmBtu when there was no benchmark. In fact ONGC was supplying gas to the government at half the rate.
5) How did Anil Ambani arrive at the price of $2.34 per mmBtu for KG basin gas?
In June 2004, National Thermal Power Corporation (NTPC) invited bids for supply of gas for its 2600 MW power plant in Kawas and Gandhar. Reliance Industries, hopeful of starting production of gas by the time NTPC’s power plant is ready bid for the project and was awarded it as the lowest ‘techno-commercial’ bidder. A Letter of Intent (LOI) was issued to Reliance Industries to supply 132 trillion units of gas per annum to NTPC for 17 years at a price of $2.34 per mmBtu. Anil Ambani used this as a basis for asking gas for his power plant.
6) Why is the NTPC-Reliance dispute all about?
Reliance Industries refused to sign the contract for supply of gas. Jairam Ramesh, the Minister of Power in a written reply to a question in Lok Sabha in 2009 said that “After issuance of LOI, RIL did not come forward to sign the Gas Sale and Purchase Agreement and sought major changes in the draft GSPA.In spite of all the efforts (by NTPC) RIL did not sign the GSPA agreed during the bidding process.”
NTPC dragged Reliance to Bombay High Court on December 20, 2005 but unfortunately the case that has dragged on. The case after nine years is still sub judice. Here again the government's disinterest in protecting the interests of its own PSU has been a matter of much debate.
While NTPC was fighting the case with Reliance in the Bombay High Court, the government referred the matter to an Empowered Group of Ministers (EGoM) in 2007 headed by none other than the current President Pranab Mukherjee, who was then the finance minister. EGoM approved a rate hike of $4.2 per mmBtu of gas. This decision was taken without a single unit of gas coming out of the KG basin.
Reliance grabbed at this opportunity and said that it could not supply gas at a price lower than the mandated price set by the government.
7) How did Pranab Mukherjee arrive at the price of $4.2 mmBtu for gas?
The price was arrived by Reliance through its ‘price discovery mechanism’. As per a Reliance crafter formula, user companies were asked to quote a price which gave them a choice of arriving at a value between $4.54 and $4.75 per mmBtu. Reliance initially forwarded a figure of $4.59 which was later brought down to $4.3, but Pranab Mukherjee claimed victory by announcing a figure of $4.2 per mmBtu.
The brazenness of the entire exercise by the government can be seen from the fact that the objections raised by the Principal Advisor, Power and Energy to the government of India, Surya P Sethi along with the then cabinet secretary were ignored by the government. Surya questions the recommendation saying that nowhere is the cost of production more than $1.43.
8) Is it exploration or exploitation?
A CAG report released in 2011 (initiated in 2007 but delayed due to non-co-operation) on Performance Audit of Hydrocarbon PSCs castigated the oil ministry along with Reliance to retain its entire KG-D6 block in contravention of the PSC. As per the PSC, Reliance should have relinquished 25 per cent of the total area outside the discoveries in 2004 and 2005, but the entire area was declared as a discovery area (after initial objections) and the company was allowed to retain it. Without drilling adequate wells, Reliance kept on claiming that there was potential for petroleum. In CAG’s words this was done to confuse potential/prospectivity with actual discovery of hydrocarbons. The move allowed Reliance to keep the entire area to itself without following the norms laid under the PSC.
In a recent report CAG has said that Reliance moved directly from discovery to commercial production, skipping the intermediate appraisal programme step required as under PSC. CAG asks, without an appraisal programme how did the government and DGH ascertain the amount of gas in the well? And if they did not know how much gas was there in the well, what is the logic and basis of blaming Reliance of hoarding gas. Further, as pointed out by CAG, how did DGH assure itself of reliability of the development plan, production rate and production costs without the appraisal report?
9) Why more investments are bad?
CAG pointed out that as per the PSC, more investments, especially in initial stages would mean more profit for the operator and less for the government. This structure gives inadequate incentive for operators to reduce capital expenditure and provides them with substantial incentives to ‘front-end’ capital expenditure. Share of government profit varies from 85 per cent in a low investment scenario to 5 per cent in a high investment scenario. This explains the case of exaggerated investment made against Reliance Industries.
Incidentally, as pointed out by V Ranganathan of IIM Bangalore in his article in Economic Times, the case of exaggerated investment was first pointed out by Anil Ambani, where he pointed out that investment as per Reliance’s plan is increasing four times but production is expected to only double. Reliance revised its production estimates from 40 mmscmd (million metric standard cubic metres per day) to 80 mmscmd while increasing its investment from $2.4 billion to $8.8 billion.
10) How was the new pricing formula arrived at?
Former RBI governor C Rangarajan came out with a formula which has been followed nowhere in the world, which has resulted in Reliance (and other players too) getting a price on import parity basis. Surya Sethi, former Principal Adviser, Power and Energy, Government of India does not mince words when he asks the Prime Minister in an open letter [Read here] not to burden the nation with Rangarajan Committee’s madness that only benefit a select few.
Conclusion
Sethi’s open letter to the Prime Minister sums up the entire issue when he points out that the CAG’s findings reveal how crony capitalism benefited RIL. The pre-qualification norms were diluted to ensure RIL qualified, the claimed size of gas discoveries, the field development plans and the investment outlays proposed escaped rigorous due diligence says Sethi. Above all, the company’s commitments under the PSC on gas output were not enforced.
The entire episode stinks of anything but natural gas. While Moily may claim that system was followed, there is enough evidence out there that says otherwise.
http://www.business-standard.com/article/companies/10-things-you-should-know-about-the-reliance-kg-d6-gas-deal-114021200357_1.html
Surya P Sethi: Another scam in the making
An open letter to the prime minister on the Rangarajan formula doubling the price of KG basin gas
Surya P Sethi
December 23, 2013
I understand your Cabinet has approved a doubling of the wellhead price of the Krishna-Godavari (KG) Basin gas. The fig leaf justifying this shameful decision is the proposed bank guarantee that would recover overpayments to Reliance India Limited (RIL), if a future tribunal concludes that RIL hoarded gas in the past. Sir, your government is party to RIL's repeated violations of its performance commitments under the Production Sharing Contract (PSC) governing theKG Basin concession. Given the already muddied performance criteria, enforcing the guarantee will be akin to recovering water from a sieve. The proposed bank guarantee does not fool anyone with some understanding of the sector and considering what happened in the KG Basin. So Sir, drop the futile bank guarantee and simply ensure that the PSC governing RIL's concession is enforced strictly and transparently.
The Comptroller and Auditor General's findings and other independent reports reveal how crony capitalism benefited RIL. The pre-qualification norms were diluted to ensure RIL qualified. The claimed size of gas discoveries, the field development plans and the investment outlays proposed escaped rigorous due diligence. Above all, RIL's commitments under the PSC and the field development plans were not enforced.
RIL's clout was on full display when, despite serious objections from me and the then Cabinet Secretary, the 2007 Empowered Group of Ministers approved the price of $4.20 per million metric British Thermal Units (MMBTU) based on an RIL-crafted formula that was unique in the world for pricing natural gas. The $2.34/MMBTU bid by RIL, in a global tender, for the same gas was ignored. A sham price discovery exercise was permitted to justify the higher price that the approved formula delivered.
Sir, your Cabinet's decision will compound this largess driven, yet again, by another indefensible formula that has no parallel, anywhere in the world, for estimating the wellhead price of conventional natural gas. The Rangarajan Committee's formula is incapable of estimating this price since none of its elements represent such a price.
It is incorrectly argued that higher prices, even for producing fields with established reserves, will enhance India's energy security. The PSC has no provision for revising wellhead price of gas from fields already declared commercial. Doing so only shifts the contractor's risk burden to gas consumers. Thus, it completely abrogates the responsibility the Supreme Court placed on the government for pricing and allocating natural resources. Ironically, the apex court fixed such responsibility through its pronouncements in a case involving the pricing and allocation of the same KG basin gas.
The wider implications of mismanaging India's energy sector are disastrous. Inappropriate energy sector policies are at the core of the current fiscal imbalance, both on the external and the domestic account. Importantly, India's socio-economic parameters that remain at or below sub-Saharan levels cannot be improved without providing affordable and adequate access to modern commercial energy to every Indian. Unfortunately, India's energy policies are not geared to achieving this objective.
Sir, some of your learned Cabinet colleagues have made price increases the mainstay of energy sector reforms. Handpicked "Expert Committees", support their arguments with dubious analysis. Allow me, Sir, to demolish the myths they together propound to mislead the nation on energy pricing.
Myth 1: The Indian energy sector is heavily subsidised: India's energy sector has many cross-subsidies but no net subsidies. Oil and gas taxes alone contribute 15 per cent of the central government's revenue and 20 per cent of total state government revenues. The erroneous policy of promoting surplus refining capacity through incentives funded by the Indian taxpayer has, in addition, forced your fellow taxpayers to subsidise foreign buyers of surplus Indian petroleum products. India exports petroleum products at prices well below those paid by domestic consumers. Quite paradoxically, petroleum products have emerged as the lead export of an energy-deficient and energy-starved India. Contrary to common belief, even coal carries no subsidies. Instead, haulage of coal and petroleum products by rail, cross-subsidises passenger fares.
Myth 2: India's energy prices are low compared to international levels: The effective cost of all primary and secondary commercial energy sources to Indian end-users is among the highest in the world, if compared correctly. Based on capacity to pay and purchasing power parity; even merit goods like kerosene and LPG, are over-priced despite massive cross-subsidisation. This is why over 70 per cent of your fellow citizens either lack access or have grossly inadequate access to modern commercial energy.
Myth 3: India is highly dependent on imported energy: The government and its "experts" repeatedly cite high import dependence as justification for raising energy prices. India imports less than 28 per cent of her primary energy consumption. Import dependence remains below 37 per cent even if one only considers India's commercial energy consumption. This compares with an almost 100 per cent import dependence of Japan. And yet, Indians already pay more for energy than the Japanese based on a defensible comparison. In any event, the economic justification for raising the price of a domestic resource whenever its consumption is supplemented through higher priced imports and denominating the domestic price in the dollars is, in itself, debatable. The selective application of such a policy to pricing different products within the energy sector, as also across different sectors, compounds price distortions.
Myth 4: India's power sector makes heavy losses because of low tariffs: The Indian power sector, taken as a whole, does not make losses. All energy sector enterprises, except the state distribution companies, are profitable. Ironically, it is the state distribution companies that generate the bulk of the cash flow that delivers the returns to the others. A fair reallocation of risks and rewards in the sector would actually see tariffs going down rather than up. Average Indian power tariffs are grossly non-competitive by global standards. The proposed increase in the price of domestic gas will make matters worse.
The deafening silence of both major political parties on the proposed doubling of the wellhead price of natural gas compelled me to write this open letter. India's energy intensity of GDP today is half of its 1990 level. However, the energy intensity of agriculture has doubled over the same period. The consequences of the proposed hike in domestic gas prices will be detrimental to India's food security.
Since an entrenched oligarchy is the defining feature of our governance structure, I humbly plead you, to not burden the nation with Rangarajan Committee's madness that only benefits a select few. At stake are the Indian industrial, agricultural and services sectors and households. Nip the proposed domestic gas price hike in the bud before it gets labelled as yet another scam under your watch, I invite an open debate with anyone of your "experts" on the inappropriateness of both the 2007 formula and the Rangarajan Committee formula for determining wellhead price of domestic gas. I am equally willing to debate any other issue raised above.
Respectfully yours
The writer is former Principal Adviser, Power and Energy, Government of India
An open letter to the prime minister on the Rangarajan formula doubling the price of KG basin gas
Surya P Sethi
December 23, 2013
I understand your Cabinet has approved a doubling of the wellhead price of the Krishna-Godavari (KG) Basin gas. The fig leaf justifying this shameful decision is the proposed bank guarantee that would recover overpayments to Reliance India Limited (RIL), if a future tribunal concludes that RIL hoarded gas in the past. Sir, your government is party to RIL's repeated violations of its performance commitments under the Production Sharing Contract (PSC) governing theKG Basin concession. Given the already muddied performance criteria, enforcing the guarantee will be akin to recovering water from a sieve. The proposed bank guarantee does not fool anyone with some understanding of the sector and considering what happened in the KG Basin. So Sir, drop the futile bank guarantee and simply ensure that the PSC governing RIL's concession is enforced strictly and transparently.
The Comptroller and Auditor General's findings and other independent reports reveal how crony capitalism benefited RIL. The pre-qualification norms were diluted to ensure RIL qualified. The claimed size of gas discoveries, the field development plans and the investment outlays proposed escaped rigorous due diligence. Above all, RIL's commitments under the PSC and the field development plans were not enforced.
RIL's clout was on full display when, despite serious objections from me and the then Cabinet Secretary, the 2007 Empowered Group of Ministers approved the price of $4.20 per million metric British Thermal Units (MMBTU) based on an RIL-crafted formula that was unique in the world for pricing natural gas. The $2.34/MMBTU bid by RIL, in a global tender, for the same gas was ignored. A sham price discovery exercise was permitted to justify the higher price that the approved formula delivered.
Sir, your Cabinet's decision will compound this largess driven, yet again, by another indefensible formula that has no parallel, anywhere in the world, for estimating the wellhead price of conventional natural gas. The Rangarajan Committee's formula is incapable of estimating this price since none of its elements represent such a price.
It is incorrectly argued that higher prices, even for producing fields with established reserves, will enhance India's energy security. The PSC has no provision for revising wellhead price of gas from fields already declared commercial. Doing so only shifts the contractor's risk burden to gas consumers. Thus, it completely abrogates the responsibility the Supreme Court placed on the government for pricing and allocating natural resources. Ironically, the apex court fixed such responsibility through its pronouncements in a case involving the pricing and allocation of the same KG basin gas.
The wider implications of mismanaging India's energy sector are disastrous. Inappropriate energy sector policies are at the core of the current fiscal imbalance, both on the external and the domestic account. Importantly, India's socio-economic parameters that remain at or below sub-Saharan levels cannot be improved without providing affordable and adequate access to modern commercial energy to every Indian. Unfortunately, India's energy policies are not geared to achieving this objective.
Sir, some of your learned Cabinet colleagues have made price increases the mainstay of energy sector reforms. Handpicked "Expert Committees", support their arguments with dubious analysis. Allow me, Sir, to demolish the myths they together propound to mislead the nation on energy pricing.
Myth 1: The Indian energy sector is heavily subsidised: India's energy sector has many cross-subsidies but no net subsidies. Oil and gas taxes alone contribute 15 per cent of the central government's revenue and 20 per cent of total state government revenues. The erroneous policy of promoting surplus refining capacity through incentives funded by the Indian taxpayer has, in addition, forced your fellow taxpayers to subsidise foreign buyers of surplus Indian petroleum products. India exports petroleum products at prices well below those paid by domestic consumers. Quite paradoxically, petroleum products have emerged as the lead export of an energy-deficient and energy-starved India. Contrary to common belief, even coal carries no subsidies. Instead, haulage of coal and petroleum products by rail, cross-subsidises passenger fares.
Myth 2: India's energy prices are low compared to international levels: The effective cost of all primary and secondary commercial energy sources to Indian end-users is among the highest in the world, if compared correctly. Based on capacity to pay and purchasing power parity; even merit goods like kerosene and LPG, are over-priced despite massive cross-subsidisation. This is why over 70 per cent of your fellow citizens either lack access or have grossly inadequate access to modern commercial energy.
Myth 3: India is highly dependent on imported energy: The government and its "experts" repeatedly cite high import dependence as justification for raising energy prices. India imports less than 28 per cent of her primary energy consumption. Import dependence remains below 37 per cent even if one only considers India's commercial energy consumption. This compares with an almost 100 per cent import dependence of Japan. And yet, Indians already pay more for energy than the Japanese based on a defensible comparison. In any event, the economic justification for raising the price of a domestic resource whenever its consumption is supplemented through higher priced imports and denominating the domestic price in the dollars is, in itself, debatable. The selective application of such a policy to pricing different products within the energy sector, as also across different sectors, compounds price distortions.
Myth 4: India's power sector makes heavy losses because of low tariffs: The Indian power sector, taken as a whole, does not make losses. All energy sector enterprises, except the state distribution companies, are profitable. Ironically, it is the state distribution companies that generate the bulk of the cash flow that delivers the returns to the others. A fair reallocation of risks and rewards in the sector would actually see tariffs going down rather than up. Average Indian power tariffs are grossly non-competitive by global standards. The proposed increase in the price of domestic gas will make matters worse.
The deafening silence of both major political parties on the proposed doubling of the wellhead price of natural gas compelled me to write this open letter. India's energy intensity of GDP today is half of its 1990 level. However, the energy intensity of agriculture has doubled over the same period. The consequences of the proposed hike in domestic gas prices will be detrimental to India's food security.
Since an entrenched oligarchy is the defining feature of our governance structure, I humbly plead you, to not burden the nation with Rangarajan Committee's madness that only benefits a select few. At stake are the Indian industrial, agricultural and services sectors and households. Nip the proposed domestic gas price hike in the bud before it gets labelled as yet another scam under your watch, I invite an open debate with anyone of your "experts" on the inappropriateness of both the 2007 formula and the Rangarajan Committee formula for determining wellhead price of domestic gas. I am equally willing to debate any other issue raised above.
Respectfully yours
The writer is former Principal Adviser, Power and Energy, Government of India
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