The FIR filed by the government headed by Arvind Kejriwal against some Union ministers and Reliance Industries Ltd (RIL) has been prominently in the news in recent days. Clearly the Aam Aadmi Party has gone to town on the subject and is likely to refer to corruption and collusion in high places to bolster their electoral prospects. This piece has nothing to do with the politics of the issue; it looks at the facts and related circumstances of the technical and financial aspects of the gas price issue.
The KG-DWN-98/3 deepwater block (also referred to as the KG-D6 block), with a contract area of 7,645 sq km, was awarded in 2000 to a consortium of RIL, the operator, and Niko Resources Limited (NIKO) through a Production Sharing Contract (PSC) for the exploration for natural gas. RIL had signed a contract with NTPC in 2004 to supply gas for its power plants at $2.34 per mmbtu for a period of 17 years. In 2007, the gas price was revised to $4.2 per unit, under RIL pressure. Very recently, the Central government has decided to double the gas price from $4.2/mmbtu to $8.4/mmbtu that would take effect from April 1, 2014.
The cost of production of gas is much less than $2.34 per mmbtu. The fact that RIL had signed long-term agreements with NTPC and Reliance Natural Resources Ltd (RNRL) for supplying gas at that rate for 17 years means that at the rate of $2.34 per mmbtu also, RIL was making significant profits. RIL’s partner NIKO has a 25-year contract with the Bangladesh Government to supply gas at the rate of $2.34/mmbtu.
After this price doubling to $8.4/mmbtu, the gas price in India has become one of the highest in the world. The cost of production at the well-head was never calculated by the government or the Rangarajan Committee appointed by the government. No attempt was made to determine cost of production accurately and independently. According to experts, the maximum price of gas at the well-head would not be more than $1.43 and the current price of $4.2 is already one of the highest in the world. There is also no explanation as to why, when the entire domestic production is consumed internally, the price was fixed in US dollars. This fluctuation in the dollar rate has now effectively increased the price of gas even further.
Even if the government was right that new price would bring in more investment in exploration, there is absolutely no justification for raising the price of gas from existing fields. More importantly, PSC does not permit a revision in the price of natural gas once the field has been declared commercial, and this field was declared commercial at $4.2/mmbtu.
In much of the western hemisphere, the wholesale price (which includes the cost of production at well-head and bulk transportation) is linked to the Henry Hub, based in the US. The average wholesale price for natural gas at Henry Hub was $3.73 in the year 2013 and $2.77 in 2012; this is consistent with the expert estimation that well-head price is of the order of $1 to $1.5 at the most, in general—RIL had in 2009 written to the DG Hydrocarbon in the petroleum ministry that their production cost at the well-head is less than $1 per unit. There is strong suspicion that RIL deliberately delayed recovery/production in anticipation of increased rate fixation by the government, going beyond the agreed terms of the PSC.
Clearly, the pricing formula adopted is inexplicable. To give an example, let us look at the pit-head cost of coal in India and compare with the price of imported coal—the landed cost of imported coal is four to five times that of the domestic pit-head coal. It would be absurd to fix the pit-head price in India at landed cost of imported coal. It is obvious that the price now agreed to with RIL clearly bears no relationship with costs. As per calculations, the impact of this price increase would cost a minimum of `54,500 crore every year at current dollar prices.
It is to be noted that crores of poor in India would be severely affected on account of the huge benefits given to the contractors. Cooking gas prices would at least double; inflation would increase significantly impacting food and energy security giving rise to higher prices for fertilisers, food products, cooking gas and the like. A vast majority of the Indian population lives below the poverty line of $1.25 per day and this will be impoverish them even further.
In principle, businesses will thrive only if they make profits; we can’t expect industry or business to make losses. It is not healthy, however, if governments through crony capitalism route encourage windfall profits—this is not the formula for sustainable development. The problem is further aggravated due to the enormous impact this decision will have on the common man in India, who will pay through his nose at exorbitant rates, to a private contractor, for access to a raw material available within India. A detailed dispassionate look at all the facts and circumstances of this matter is imperative.
Subramanian is a former Cabinet Secretary