The Supreme Court verdict in the case between Reliance Industries (RIL) and Reliance Natural Resources (RNRL) has brought crystal-clear clarity to the supreme role of the government in the gas sector. According to the verdict, the government will take the final call on pricing, marketing and utilisation of gas.
Put simply, once an energy company discovers gas, the government walks in to fix the consumer list to whom the gas will be sold, the price at which it will be sold, and the quantity that each consumer will get. The energy company that will take the risk of equity investment in exploration will have to be content with a rate of return that the government will deem fit as per its wisdom, keeping ‘national priorities’ in mind.
While this is perhaps the ‘best solution in the given circumstances’, it may not work in the long term. Private investors would want more flexibility and a decontrolled regime if they are to invest big bucks in the country’s hydrocarbon sector. So, while the verdict has removed the uncertainty for RIL, RNRL and millions of shareholders, it will be seen with scepticism by future investors.
In fact, even existing investors would be wary if this was to be the permanent policy. As global fund manager, Arvind Sanger, managing partner of Geosphere Capital Management, said, the government can always second-guess the price at which the fuel will be sold. More importantly , while regulation is necessary in imperfect markets — like in India where demand far outstrips supply — the question is whether it should be the government that should double up as the regulator? After all, governmentowned companies are also competing with private oil companies for the same blocks. The government’s role in fixing all these terms could certainly lead to questions over conflict of interest.
There is an urgent need to establish an independent, empowered regulator for the sector who should be able to take such decisions till the market evolves. More importantly, the regulator should be in a position to evolve the policies from time to time reflecting the evolution of the market in India and the changing global gas market.
That apart, the government has to initiate and proactively work towards establishing a market in the country. One of the biggest impediments in developing the country’s gas market is the abysmal growth of the pipeline sector. Just like power transmission lines that carry electricity from the production point to the consumer, pipelines have to be up and running if the country has to maximise its gas potential.
The thumb rule for such investments is 1:1.5, that is, for every rupee spent on generation, Rs 1.5 needs to be spent on building transmission and distribution lines. The same, or perhaps more, is true of the natural gas sector. So, with gas production ramping up with new producers in the game, there is an urgent need to create pipelines, both trunk and spur, across the country that will allow consumers to access the gas.
At this point, there are only two trunk pipelines in the country: the HBJ pipeline that connects the western coast to northern India, and the recently-commissioned Kakinada-Bharuch pipeline by Reliance Gas Transmission India (RGTIL). The entire southern region, which has enough and more gas consumers like fertiliser, power and industry, has a huge unmet demand. Lack of pipeline in the region leaves the region with no choice but to buy expensive alternatives like naphtha or imported liquefied natural gas. This also tends to impact price bids. While RIL cannot be blamed — as it was following government directives — bids for the Krishna-Godavari gas — the first attempt to adopt a transparent discovery mechanism — were only called from consumers who had stranded capacity, i.e., consumers who were unable to operate at full capacity due to lack of gas.
The entire process of price discovery can only be ascertained if all players can participate in the bidding process. This will need the country to develop a gas pipeline network like the developed markets. The spot market in such economies constantly reflects changes in global demand-supply dynamics. For instance, gas prices have crashed to just about $3 per million British thermal units (mmBtu) from the highs of $11-12 per mmBtu just a year ago with the discovery and popular acceptance of shale gas in the US as an alternative form of energy source. Unfortunately, little has been done to get the pipelines going. In fact, the government’s flip-flop on pipeline policy and the differences between the petroleum ministry and the petroleum and natural regulatory board — which has largely been left with little powers — has only delayed the construction of pipelines. The pipeline sector needs to be opened up and investors should be allowed to invest in trunk and spurt pipelines as long as they can take the risk of getting the gas and the consumers. The government’s role in this has only jeopardised the growth and deregulation of the gas industry.
Policymakers who launched the new exploration licensing policy (Nelp) in 1999 had sought to initiate deregulation in the upstream exploration sector with this move — something which even defence lawyers (RIL’s legal counsels) cited while arguing the case. RIL chief counsellor Harish Salve admitted that at one point, RIL too had approached the government for its marketing rights. The objective behind Nelp was to open up exploration to private oil companies as opposed to the earlier regime where private oil companies had to mandatorily tie up with a national oil companies to get production rights.
So, while a private oil company could take up a block identified by the government for exploration, it would have to bring in a PSU oil company as a partner to begin producing crude oil or gas. Blocks such Panna Mukta and Cairn’s Barmer are cases on such nominated blocks before Nelp was introduced.
The Supreme Court verdict has brought in the much-needed clarity, removing all doubts about who manages affairs in the gas sector in the country, but this can only be a stop-gap solution to the larger issue of evolving India’s natural gas market. Is the government listening?
Source: Economic Times
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