The government is weighing policy options to end the differential pricing of natural gas which has resulted in a fragmented market for this benign fuel—a potential turn-off for investors.
Uniform pricing of gas from various sources to the consumer by way of pooling of prices doubtless has many advantages, said petroleum secretary RS Pandey in an exclusive interview with FE. Under pooling of prices, the producer will get the price, as per the production sharing contract between him and the government. But the consumer prices will be uniform, irrespective the source of gas, he explained. Pandey also spoke about the achievements of the ministry of petroleum and natural gas of the past year and the government’s handling of the RIL-RNRL dispute over supply and pricing of KG D6 gas.
The importance of gas, a comparatively benign fuel, in the energy economy of the country is on the ascendancy. Isn’t it time the government started thinking of ending the fragmentation of the gas market where multiple pricing methods exist?
There is already a thinking in that direction. Currently, there are so many prices for natural gas within the country, and there is a thinking that why can’t there be uniform pricing? Uniform pricing by way of pooling of prices doubtless has many advantages. But it needs to be examined how far the pooling is feasible. This is the subject matter of a study by GAIL India which is expected to come out with its findings this month.
There are several potential implications for such pooling, and these need to be examined. There is administered pricing on about half of the volume of gas produced. Since APM price is cheap, consumers are happy with it, but the producing companies are adversely affected. Then there is the K-G DG gas that is priced at $4.2 per million British thermal unit (mmbtu). There is also gas from various other sources priced between $3.5 to $5.7 per mmbtu.
Imported gas (in the form of LNG which needs to re-gasified on Indian soil) comes at an even higher price of $4.5 per mmbtu. The spot prices of LNG are around $6 per mmbtu. Pooling of prices will have several implications—financial, legal and administrative--for different stakeholders. We have to study all these aspects.
Under pooling of prices, the producer will get the price, as per the production sharing contract between the producer and the government. But there are several questions that need to be answered in this connection: At what price will the gas go to the consumer? Would pooling of prices affect the contractual liabilities of the parties? How the whole process would be managed and who exactly would do that? What would be the implications of uniform pricing on future production sharing contracts?
The production sharing contract now allows 100% cost recovery and is very conducive for investors. Even in a changed scenario, investor interests as well as the consumer interests will need to be protected.
Won’t a fixed price to all consumers amount to thwarting the principle of free market? Isn’t well-regulated free market a better option?
Pooling prices for the consumers is not necessarily a market distortion. Even price fixation is there in many sectors. For example, consumer price of electricity continues to be determined by state regulatory commissions. The price at which state electricity Boards buy from producers is also regulated. At the same time, a part of the power is traded freely in the market.
How would you chronicle the past year’s achievements of the ministry of petroleum and natural gas?
The past year was one of many unprecedented happenings in India’s petroleum sector. It was marked by unprecedented volatility in crude prices, unprecedented nationwide strike by oil PSU officers, unprecedented attack and calumny against the ministry in the wake of RIL-RNRL case and yet, significant rise in domestic production of oil and gas which was also unprecedented in the last about a decade. Again, the acquisition abroad of the British company, Imperial Energy with producing assets in Russia was the first of its kind as it was acquired lock, stock and barrel.
Externalities continued to decisively impact the sector due to our need to import large quantities of crude oil. To the surprise of every observer, crude prices saw violent swings in the year, tumbling from the July 2008 peak of $147 a barrel to $35 in February this year, and again, to recover to the current level of $80. To manage the situation arising out of price volatility was indeed a tough job, yet we managed to get over the tumult through some kind of balancing exercise.
We were able to ensure, most of all, that the interests of consumers are protected. At the same time, we did take care of the oil companies and the national economy sufficiently circumspectly. It may be noted like in the absence of right policy interventions and administrative measures, such volatility could have been ruinous for us, like it actually was for several other economies.
The strike by officers of oil PSUs threatened to cripple the mobility and the economy. The government was, however, able to manage that with fairness and firmness.
The heartening feature was that, after a decade of near stagnation, the past year saw a significant rise in the production of crude oil and natural gas. In 2009-10, crude oil production would go up by 11%, while natural gas production would increase by 53%.
Major improvements came about in the area of distribution of petroleum products as well. All bans on issuing new liquefied petroleum gas (LPG) connections and on the issue of double cylinders were removed. A grievance redressal mechanism was put in place. There has been a noticeable improvement in consumer satisfaction.
We have also been able to present Vision 2015 to the nation, highlighting the milestones to be achieved in several areas, with consumer interest on the top of our mind. A roadmap for city gas service was also brought out.
Another issue which dominated the scene was the big court case between Reliance Industries Ltd and the Reliance Natural Resources Ltd in the backdrop of which an unprecedented attack and calumny against the ministry of petroleum and natural gas (was launched) through paid advertisements in several national dailies and otherwise. We could overcome that phase with equanimity.
Another highlight of the year was ONGC Videsh’s acquisition of Russia’s Imperial Energy. This is the first full-fledged acquisition of a foreign oil company by us. Other overseas investments through ONGC were for taking participative interests along with other global entities in both producing/ exploration fields in various parts of the world.
What exactly helped increase hydrocarbon output in 2009?
The first major output of New Exploration & Licensing Policy (Nelp) was in the form of K-G D6 production and this has the potential of doubling domestic production at its peak, expected in the next few months. Another major breakthrough was in the area of crude oil. Cairn Energy’s production from Rajasthan’s Barmer district has commenced and the expectations are that this would account for 25% of India’s domestic oil production at the peak, expected in about a year.
The government had to take several decisions to facilitate the production. Any procrastination in this regard would have adversely affected the projects.
Are you open to more acquisitions abroad?
Of course. We are open to more such acquisitions. We have to have energy security and one way is to go shopping abroad for assets. We do look out for possible acquisitions all over the globe. It is an ongoing process, but at this stage, nothing more can be said about any deal.
Recently, the finance ministry hinted at footing oil subsidy bills by way of direct cash from the Union Budget, instead of the fiscally not-so-prudent practice of issuing oil bonds for the purpose. Your views please.
Under-recovery of oil marketing companies in respect of LPG and kerosene will have to be paid for by the government. If it can be through cash, it’s still better. Or else, bonds have to be issued. We have already asked for a sum of Rs 20,000 crore for adjusting the under-recoveries from LPG and kerosene sales. For the whole year, under-recoveries on these two fuels are estimated to be of the order of over Rs 30,000 crore.
There would be another Rs 12,000 crore (under-recoveries) on account of motor spirit and diesel.
With yet another committee—the one headed by Kirit Parikh—dwelling upon the vexed issues of pricing of oil products and the subsidies, what would be the petroleum ministry’s inputs to it?
All stakeholders have submitted their views to the Parikh committee, which I’m sure, would find a solution to the question. Since the oil marketing companies are the main pillars of the country’s energy security system, their interest cannot be compromised. At the same time, consumer interest should be kept in mind, too. It is indeed a tough exercise.
In the Nelp-VIII auction, many blocks received single bids, that too from state owned-ONGC. What can we do to make future auctions more attractive?
Every year we hold pre-bid conferences with the industry and then take a decision on the auction of fields in the light of their views. We will meet the industry again this year for the next Nelp auction.
Managing the carbon emission of state owned oil companies is integral to India’s efforts to reduce the carbon intensity of GDP.
One way, of course, is to consume more gas than oil, as the former is a relatively cleaner fuel.
Already, the trend is in that direction, and with the potential of more extensive pipeline network, gas could emerge as the pre-eminent fuel in the years to come, substituting oil in a major way. All oil companies are taking concrete measures to reduce their carbon footprint. In both the upstream and downstream areas, various pollution control projects are underway.
In the RIL-RNRL dispute and litigation over supply and pricing of KG D6 gas, the government’s role has been criticised in certain quarters. The allegation is that the petroleum ministry did not intervene in time even as it was clear that the feud between the Ambani brothers could potentially undermine the government’s ability to perform its function as the guardian and owner of natural resources. Later, when the government intervened after the Bombay High court judgement, some quarters saw a bias in favour of one of the brothers.
The case is still sub judice. Hence it may not be appropriate to delve into the merits or otherwise of the case as such. However, the charges against the ministry are completely incorrect and unfounded. Ordinarily, the government need not intervene in private dispute between parties. But the government cannot merely watch when the case adversely impacts national interests. The ministry had intervened even earlier in the case in the Bombay High Court in the wake of injunction on production and sale of gas and got the injunction vacated.
Again, the cause of action for filing a special leave petition in the Supreme Court arose after the judgment of the Bombay High Court which, for the first time, gave effect to the family MoU between the two parties which was contrary to the government’s policies on utilization and pricing of gas which flowed from the Production Sharing Contract and the government’s ownership of gas.
The judgment also revealed the contents (relating to gas) of the MoU which had appropriated the entire gas-- not only from KG D6 field, but from all fields being operated and to be operated by RIL in future between the parties. This would have adverse implications for development of gas-based industries in the country and would have set wrong precedents for other contractors as well. The users of gas based industries also represented to the ministry that their interests be protected in the wake of the judgement of the Bombay high Court. It was therefore, appropriate for the government to intervene. It would have rather been inappropriate not to intervene. Unfounded allegations or fear of such allegations cannot deter government from following the right course of action. The government’s intervention in the matter has been without favour or fear....
Source: Financial Express
____________________________________________________________________________
Uniform pricing of gas from various sources to the consumer by way of pooling of prices doubtless has many advantages, said petroleum secretary RS Pandey in an exclusive interview with FE. Under pooling of prices, the producer will get the price, as per the production sharing contract between him and the government. But the consumer prices will be uniform, irrespective the source of gas, he explained. Pandey also spoke about the achievements of the ministry of petroleum and natural gas of the past year and the government’s handling of the RIL-RNRL dispute over supply and pricing of KG D6 gas.
The importance of gas, a comparatively benign fuel, in the energy economy of the country is on the ascendancy. Isn’t it time the government started thinking of ending the fragmentation of the gas market where multiple pricing methods exist?
There is already a thinking in that direction. Currently, there are so many prices for natural gas within the country, and there is a thinking that why can’t there be uniform pricing? Uniform pricing by way of pooling of prices doubtless has many advantages. But it needs to be examined how far the pooling is feasible. This is the subject matter of a study by GAIL India which is expected to come out with its findings this month.
There are several potential implications for such pooling, and these need to be examined. There is administered pricing on about half of the volume of gas produced. Since APM price is cheap, consumers are happy with it, but the producing companies are adversely affected. Then there is the K-G DG gas that is priced at $4.2 per million British thermal unit (mmbtu). There is also gas from various other sources priced between $3.5 to $5.7 per mmbtu.
Imported gas (in the form of LNG which needs to re-gasified on Indian soil) comes at an even higher price of $4.5 per mmbtu. The spot prices of LNG are around $6 per mmbtu. Pooling of prices will have several implications—financial, legal and administrative--for different stakeholders. We have to study all these aspects.
Under pooling of prices, the producer will get the price, as per the production sharing contract between the producer and the government. But there are several questions that need to be answered in this connection: At what price will the gas go to the consumer? Would pooling of prices affect the contractual liabilities of the parties? How the whole process would be managed and who exactly would do that? What would be the implications of uniform pricing on future production sharing contracts?
The production sharing contract now allows 100% cost recovery and is very conducive for investors. Even in a changed scenario, investor interests as well as the consumer interests will need to be protected.
Won’t a fixed price to all consumers amount to thwarting the principle of free market? Isn’t well-regulated free market a better option?
Pooling prices for the consumers is not necessarily a market distortion. Even price fixation is there in many sectors. For example, consumer price of electricity continues to be determined by state regulatory commissions. The price at which state electricity Boards buy from producers is also regulated. At the same time, a part of the power is traded freely in the market.
How would you chronicle the past year’s achievements of the ministry of petroleum and natural gas?
The past year was one of many unprecedented happenings in India’s petroleum sector. It was marked by unprecedented volatility in crude prices, unprecedented nationwide strike by oil PSU officers, unprecedented attack and calumny against the ministry in the wake of RIL-RNRL case and yet, significant rise in domestic production of oil and gas which was also unprecedented in the last about a decade. Again, the acquisition abroad of the British company, Imperial Energy with producing assets in Russia was the first of its kind as it was acquired lock, stock and barrel.
Externalities continued to decisively impact the sector due to our need to import large quantities of crude oil. To the surprise of every observer, crude prices saw violent swings in the year, tumbling from the July 2008 peak of $147 a barrel to $35 in February this year, and again, to recover to the current level of $80. To manage the situation arising out of price volatility was indeed a tough job, yet we managed to get over the tumult through some kind of balancing exercise.
We were able to ensure, most of all, that the interests of consumers are protected. At the same time, we did take care of the oil companies and the national economy sufficiently circumspectly. It may be noted like in the absence of right policy interventions and administrative measures, such volatility could have been ruinous for us, like it actually was for several other economies.
The strike by officers of oil PSUs threatened to cripple the mobility and the economy. The government was, however, able to manage that with fairness and firmness.
The heartening feature was that, after a decade of near stagnation, the past year saw a significant rise in the production of crude oil and natural gas. In 2009-10, crude oil production would go up by 11%, while natural gas production would increase by 53%.
Major improvements came about in the area of distribution of petroleum products as well. All bans on issuing new liquefied petroleum gas (LPG) connections and on the issue of double cylinders were removed. A grievance redressal mechanism was put in place. There has been a noticeable improvement in consumer satisfaction.
We have also been able to present Vision 2015 to the nation, highlighting the milestones to be achieved in several areas, with consumer interest on the top of our mind. A roadmap for city gas service was also brought out.
Another issue which dominated the scene was the big court case between Reliance Industries Ltd and the Reliance Natural Resources Ltd in the backdrop of which an unprecedented attack and calumny against the ministry of petroleum and natural gas (was launched) through paid advertisements in several national dailies and otherwise. We could overcome that phase with equanimity.
Another highlight of the year was ONGC Videsh’s acquisition of Russia’s Imperial Energy. This is the first full-fledged acquisition of a foreign oil company by us. Other overseas investments through ONGC were for taking participative interests along with other global entities in both producing/ exploration fields in various parts of the world.
What exactly helped increase hydrocarbon output in 2009?
The first major output of New Exploration & Licensing Policy (Nelp) was in the form of K-G D6 production and this has the potential of doubling domestic production at its peak, expected in the next few months. Another major breakthrough was in the area of crude oil. Cairn Energy’s production from Rajasthan’s Barmer district has commenced and the expectations are that this would account for 25% of India’s domestic oil production at the peak, expected in about a year.
The government had to take several decisions to facilitate the production. Any procrastination in this regard would have adversely affected the projects.
Are you open to more acquisitions abroad?
Of course. We are open to more such acquisitions. We have to have energy security and one way is to go shopping abroad for assets. We do look out for possible acquisitions all over the globe. It is an ongoing process, but at this stage, nothing more can be said about any deal.
Recently, the finance ministry hinted at footing oil subsidy bills by way of direct cash from the Union Budget, instead of the fiscally not-so-prudent practice of issuing oil bonds for the purpose. Your views please.
Under-recovery of oil marketing companies in respect of LPG and kerosene will have to be paid for by the government. If it can be through cash, it’s still better. Or else, bonds have to be issued. We have already asked for a sum of Rs 20,000 crore for adjusting the under-recoveries from LPG and kerosene sales. For the whole year, under-recoveries on these two fuels are estimated to be of the order of over Rs 30,000 crore.
There would be another Rs 12,000 crore (under-recoveries) on account of motor spirit and diesel.
With yet another committee—the one headed by Kirit Parikh—dwelling upon the vexed issues of pricing of oil products and the subsidies, what would be the petroleum ministry’s inputs to it?
All stakeholders have submitted their views to the Parikh committee, which I’m sure, would find a solution to the question. Since the oil marketing companies are the main pillars of the country’s energy security system, their interest cannot be compromised. At the same time, consumer interest should be kept in mind, too. It is indeed a tough exercise.
In the Nelp-VIII auction, many blocks received single bids, that too from state owned-ONGC. What can we do to make future auctions more attractive?
Every year we hold pre-bid conferences with the industry and then take a decision on the auction of fields in the light of their views. We will meet the industry again this year for the next Nelp auction.
Managing the carbon emission of state owned oil companies is integral to India’s efforts to reduce the carbon intensity of GDP.
One way, of course, is to consume more gas than oil, as the former is a relatively cleaner fuel.
Already, the trend is in that direction, and with the potential of more extensive pipeline network, gas could emerge as the pre-eminent fuel in the years to come, substituting oil in a major way. All oil companies are taking concrete measures to reduce their carbon footprint. In both the upstream and downstream areas, various pollution control projects are underway.
In the RIL-RNRL dispute and litigation over supply and pricing of KG D6 gas, the government’s role has been criticised in certain quarters. The allegation is that the petroleum ministry did not intervene in time even as it was clear that the feud between the Ambani brothers could potentially undermine the government’s ability to perform its function as the guardian and owner of natural resources. Later, when the government intervened after the Bombay High court judgement, some quarters saw a bias in favour of one of the brothers.
The case is still sub judice. Hence it may not be appropriate to delve into the merits or otherwise of the case as such. However, the charges against the ministry are completely incorrect and unfounded. Ordinarily, the government need not intervene in private dispute between parties. But the government cannot merely watch when the case adversely impacts national interests. The ministry had intervened even earlier in the case in the Bombay High Court in the wake of injunction on production and sale of gas and got the injunction vacated.
Again, the cause of action for filing a special leave petition in the Supreme Court arose after the judgment of the Bombay High Court which, for the first time, gave effect to the family MoU between the two parties which was contrary to the government’s policies on utilization and pricing of gas which flowed from the Production Sharing Contract and the government’s ownership of gas.
The judgment also revealed the contents (relating to gas) of the MoU which had appropriated the entire gas-- not only from KG D6 field, but from all fields being operated and to be operated by RIL in future between the parties. This would have adverse implications for development of gas-based industries in the country and would have set wrong precedents for other contractors as well. The users of gas based industries also represented to the ministry that their interests be protected in the wake of the judgement of the Bombay high Court. It was therefore, appropriate for the government to intervene. It would have rather been inappropriate not to intervene. Unfounded allegations or fear of such allegations cannot deter government from following the right course of action. The government’s intervention in the matter has been without favour or fear....
Source: Financial Express
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