Rationalise natural gas prices

The ministry of petroleum and natural gas is mulling an increase in the price of natural gas (under APM) produced by national oil companies (ONGC and OIL) and is reportedly in the final stage of decision-making. The ultimate objective, however, is to bring parity between the APM price ($1.79 per mmBtu) and the price of the gas produced from KG basin ($4.20 per mmBtu) by 2013 in a phased manner. There are indications that the gas procured from different sources might be pooled or averaged out to make the price uniform for all consumers. Given that natural gas is a sunrise sector and is at its nascent stage, this measure would facilitate in the removal of multiple distortions in its source-based pricing. Of course, the national oil companies would be the obvious beneficiaries, but the decision might invite flak from the key consuming sectors.

Natural gas is mainly used in power generation, fertiliser, city gas, petrochemicals & refineries, steel and sponge iron industries. Fertiliser and power plants consume around 70% of the total gas supply and command preferential allocation of APM gas, the price of which is proposed to go up. As natural gas is one of the most cost-effective fuels for fertiliser plants, gas-based fertiliser (urea) production accounts for the lion's share of total production. The government clearly prefers the use of natural gas to naphtha for the fertiliser sector as it would eventually help in pruning the piling subsidy bill. Furthermore, lower input costs would also allow government to mull the process of complete decontrol of fertiliser pricing.

As the end-use of fertiliser is regulated and given its strategic importance in terms of food security, the bigger question is whether the proposed increase in APM gas price is uneconomical from an operational point of view. In this context, an earlier analysis carried out by Goldman Sachs when this proposal of price rationalisation first came to the fore in 2007 demonstrates that even at the price of $6 per mmBtu (which far exceeds the price that may result from rationalisation through pooling), natural gas continues to be more competitive than other conventional high-priced inputs for fertiliser production.

The current gas-based power generation capacity in India is around 14,900 mw, which is about 10% of the total installed capacity. However, operating existing gas-based capacity at a plant load factor (PLF) of 90% or more would demand an amount of gas that far exceeds the current allocated supply. Thus, most of the functional projects are operating at sub-optimal PLF. Moreover, some gas-based power projects have been shelved or are pending commissioning due to non-availability of gas. But, with RIL already reaching a record level of production and superseding the threshold figure of 100 mmcmd from its D6 block in KG basin (in December 2009), such deficit related problems are likely to be sorted out. In other words, gas-based power plants would have to diversify their sources even if that amounts to an eventual increase in input cost. The analysis carried out by Goldman Sachs in 2007 (based on the then cost of power generation) inferred that even at $4.75 per mmBtu (higher than the base price of KG basin gas), natural gas-based plants are not uneconomical to operate as compared to imported coal-based or non-pithead coal-based power plants. However, the continued dominance of pithead coal-based power plants remains indisputable. The implications on viability and competitiveness of gas-based power plants, on account of movements to market-based prices in future would, however, be contingent upon the tariff regime in the power sector (whether it is capable of absorbing the increased gas price) and on the availability of enhanced flexibility to offload the available capacity of gas-based power plants (say, by operating partially or fully as merchant enterprises and marketing their capacity to inter-state or intra-state traders). The implication on affordability would also depend upon whether the power sector manages to substantially reduce its transmission and distribution losses.

The array of distortions in the natural gas sector do not allow the sector to thrive and send a wrong signal for the investors to invest in exploration and production business in the country that is so crucial to promote this viable and cleaner alternative. Moreover, given that the production of existing fields generating APM-gas is already dwindling, the key consuming sectors would eventually have to diversify their input basket towards other sources of natural gas even though they command higher prices. Thus, the gas price rationalisation is unlikely to hurt the consuming sectors much in the medium to long term and could be considered a step in the right direction.

Source: Financial Express
__________________________________________________________________________________