The above example signifies the impact of policies on the economy and pricing of commodities. However, Natural gas is one of the commodities prices of which vary with regions and markets. Similarly, the pricing formula/strategy also varies with countries, markets and even with different contracts. Markets like the US and Europe are considered to be matured gas markets. Gas prices in these regions are market driven. When the gas demand in the region is high, gas price rises and when the demand is low, price settles down. Gas price, in these regions, surges during the winters on the back of staggering energy demand whereas it cools down during the summers as the energy demand dips during the season. Natural gas, in these regions, is used extensively for various household and industrial purposes and priced rightly compared to the price of substitute fuel and with respect to demand.
Pricing of gas has always been an issue globally except these matured markets. Gas prices in most of the developing markets are regulated and kept artificially low to support to domestic industries. However, the strategy of keeping the price low can turn into market spoiler and erode the prospects of developed market even before the evolution. A case in point of deteriorated gas market due to low prices could be taken from Russia. Russian gas market is highly regulated by the Russian Government and the prices are artificially kept at extremely low levels. This has resulted in investors being unable to recover their cost through gas sale. Low prices have not only damaged the gas market of Russia but also dampened the growth of Coal-Mine-Methane (CMM) and coal market of the country. As the gas prices are relatively low priced in Russia, it has become unviable for the investors to put in their money in CMM business. Productivity of CMM in Russia is 3-5 times lower than that in the US, Canada and Australia. Also, because gas prices are kept artificially at low levels, the coal prices are unable to compete with the gas prices. Thus, the country has witnessed very low competitiveness in coal-fired power generation.
Artificially kept low gas prices can deteriorate any gas market particularly an evolving one like India. Low gas prices not only discourage the investors to take high risk for their investment due to low rate of return but also do not provide any incentive for industries to switch over from costly and environmentally hazardous liquid and solid fuels.
Historically, gas prices in India have been highly regulated and kept under the Government influence. Even today, a major chunk of domestically produced gas, particularly from the fields operated by state-run ONGC and OIL, is under-priced through Admistered Price Mechanism (APM). In fact, demand from certain quarters, of late, has been made to sell the gas produced from RIL operated prolific KG D-6 block at discounted prices. Gas sold from the fields of public sector upstream companies at discounted rates compared to their private sector peers has not only impacted the financial health of these companies but also dis-incentivised the state-run firms to keep the production intact from depleting fields.
Government’s constant intervention in regulating the prices of petroleum products and natural gas has led to poor response from global upstream companies during the last two NELP rounds i.e. NELP VII and NELP VIII. Under NELP VII, companies bid only for 45 blocks of the 57 blocks offered, whereas out of the 70 blocks offered under the NELP VIII, meager 36 blocks attracted bids from interested parties. The poor response to NELP clearly depicts the concerns of upstream companies about the pricing and other policies of the Indian Government. A fair market driven pricing would have rather attracted major upstream companies to the Indian sedimentary basins.
A fair example of market getting evolved due to market-driven pricing system would be power market of in the country. Before the liberalization of power market, the power tariffs were highly regulated, thus leaving only handful of state-run players in generation and distribution business. This resulted in sluggish growth of power generation in the country. Lack of substantial distribution infrastructure due to low level of margins prevented the companies to enter into distribution business and henceforth deprived million of households from access to electricity. Power sector reform brought along reform in power tariff structure. Power trading started with reform in power sector. The electricity tariff under this regime is driven by the demand and supply factors. The price reform opened the doors for numerous private sector players who ventured into generation and distribution business. Competition in the market resulted increased power generation, betterment in power distribution infrastructure and improved the quality of supply. Improved market dynamics due to change in pricing strategy is evident from the fact that after the introduction of Electricity Act 2003 power generation in the country grew continually at 5% and above rate, which was struggling at 3.1% in 2002-03.
The examples stated above infer that low gas prices are detrimental for market particularly an evolving market like India. Therefore, the Indian Government needs to open up the gas market completely and allow the gas prices to be driven by market forces. Gas price needs to be priced competitively compared to its alternate fuels. Moreover, as the hydrocarbon exploration is an extensively capital intensive and high risk business, the gas pricing must reflect encouraging vibes for risk-taking investors. Policies with respect to the gas market should be formed bearing in mind the right-pricing strategy for the industry as well as the investors.
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