Clean up the energy mess

In two weeks’ time, the Supreme Court will start hearing one of India’s landmark cases: the lawsuit between two of India’s richest men, Mukesh and Anil Ambani, on
whether natural gas, a fuel produced by the former should be sold to the latter and on what terms.

Why should a lawsuit between two wealthy and estranged brothers over a deal that they signed four years ago, make news? The lawsuits between Mukesh-controlled Reliance, Anil-run RNRL and state-owned power company NTPC, are about how natural gas should be priced in India and how it should be used. Very soon, relatively clean natural gas will become a major fuel for India, so it’s important to settle these things now.

The world over, two industries, power and fertiliser, use up four-fifths of all gas production: it’s likely to be the same here. So, India’s growth will depend on what we pay for fuel and power.

Yet over the last three years, as the Ambani-NTPC gas lawsuits have wound their way through courts, it’s become clear that the ministry of oil and gas, which is supposed to implement policies for a transparent and efficient market for fuel, has done the opposite. Its reforms remain half-baked, its regulation is opaque and furtive. So India’s energy sector that has so much promise remains an investors’ nightmare.

In 2004, NTPC floated a global tender to buy 12 million cubic metres of gas to run some power plants. RIL won the bid, for a price of $2.34 per unit. Within RIL, it was also decided that a subsidiary called RNRL would get to buy more than double the amount of gas contracted by NTPC, at the same price. The Ambani brothers split a year later, RNRL went to Anil and both these agreements ran into trouble. The oil ministry stepped into the breach and got into the act of ‘fixing’ gas prices, which were earlier supposed to be determined through bids.

The gas-price drama started four years ago and apart from the oil ministry, eventually sucked in a committee of secretaries, the prime minister’s economic advisory council and finally a group of ministers. The outcome: a price of $4.2 per unit, but only for gas from RIL’s D6 basin in the Bay of Bengal.

But how will gas produced elsewhere in other exploration blocks be priced? Nobody, least of all the oil ministry, is interested. That’s odd, considering that over the last 10 years the oil ministry has auctioned off about 55% of India’s basins, in seven rounds of exploration bids. Over 100 discoveries have been made. Two players have emerged dominant, with nearly 80% of the auctioned plots: RIL with 33 fields and state-owned ONGC with 59.

India’s gas pricing rules are a mess. Small amounts of gas discovered by state-owned companies more than 10 years ago are sold for around $2 or less to fertiliser companies. The NTPC-RIL-RNRL contract price is $2.34; the government mandated price for the same stuff is $4.2. If you want to import gas that comes as liquids in tankers, you pay a floating rate that can go as high as $8 per unit. And we’re now waiting to see how all the other, non-D6 gas that’ll bubble up from newly-minted blocks will be priced.

Exactly how much oil and gas has been discovered in all those blocks? At what rate are they expected to flow? For how long? And how much of the claimed discoveries.

have been verified by the oil ministry? Nobody outside the ministry really knows. The Directorate General of Hydrocarbons (DGH), the ministry’s watchdog for exploration, provides no detailed numbers.

The DGH is also supposed to make sure that developers don’t inflate their investment claims in their blocks, something that’ll eat into taxpayers’ share of fuel profits and affect the price of gas. Again the DGH comes up in poor light: there’s little or no public data about investments made in most blocks and how they were approved. And naturally, there’s a dispute over how the DGH allowed RIL to nearly quadruple its investments while the volume of gas to be produced doubled.

The DGH claims that its investment approval has been vetted by the government’s auditor, the Comptroller and Auditor General (CAG). But the CAG says it hasn’t been able to complete its audit for two years. Sure, it asked RIL for some data sometime ago, but RIL is a private company. Why should it hand over any data to the CAG, which is supposed to audit only government companies?

The state of India’s energy regulation — and the mess it’s landed the sector in — has got policymakers worried. Last month the Planning Commission, headed by Montek Singh Ahluwalia, warned that government-administered fuel prices have driven potential investors, and competition, out of the fuel retail business.

It worried about the mess in gas pricing, but came up with a solution: till the end of 2009, while gas supplies remained below demand, regulate prices. Thereafter, as supplies increase over the next two years or so, “pricing of gas ... including from new discoveries, should be left to competitive markets.”

Yet, while the Commission spoke of regulation, it fretted about the existing state of the energy watchdog: “It is essential for the DGH to be strengthened and made independent of the ministry. There is an urgent need to have an independent regulator for both upstream and downstream sectors to ensure that markets function in a competitive manner.”

Having said that, the Commission added: “This recommendation has not been implemented by the ministry. The DGH, the upstream regulator, is not completely independent of the ministry, which is exercising a strong control over it.”

India needs competition and investments in its fuel economy. But to get there, it needs clean and transparent rules to play by, rules that are perceived to be fair by everyone. Otherwise, no serious overseas investor will bet big on exploring here. After 10 years of trying to drum up interest in new oil and gas ventures, not a single large overseas oil player operates a big exploration project in India: no ExxonMobil, no Shell, no BP, Total or ENI.

Controversy and lawsuits will continue to haunt the sector. Today RIL, RNRL and NTPC are at each others’ throats. Tomorrow it’ll be someone else. The oil and gas ministry claims that energy is a national asset. It is. And that’s why taxpayers deserve a better deal than what they’ve got so far.

http://economictimes.indiatimes.com/
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