Subsidies offered to LPG and kerosene customers are well known. But how they are misused and the resulting losses to the government are less known. When we look at the natural gas sector, only few know about the huge subsidies given to the customers of that sector.
Unfortunately no NGO or CAG has taken any interest to expose the amount of money that can be diverted to the private sector from the public sector by the stroke of a pen in the gas sector. Depending upon the level of international oil prices, this can vary between as little as Rs 10,000 crore to as high as Rs 28,000 crore per year.
Traditionally all over the world, oil companies did not usually look for gas reserves. However, in India during the last 35 years, it has not been the case. We have great demand for any domestic energy sources. Gas and oil has more or less equal economic values in India unlike in many parts of the world. Gas reserves can be as easily developed with high economic returns as oil reserves.
Misguided policy
Unfortunately because of misinformed and misguided pricing policy of the petroleum ministry, natural gas industry has failed to develop. In late 80s, some top level bureaucrats in Delhi even thought of transferring gas reserves from ONGC to GAIL purely for bureaucratic reasons without any compensation.
They put zero value on gas reserves though ONGC had spent money to discover them. Such was the step motherly treatment given to the gas sector. For a long time Bombay High gas was flared when it could have been captured economically saving crores of rupees.
With the recent discovery of huge gas reserves by Reliance, CAIRN, ONGC, etc on the east coast of India, the government is forced to take interest in gas pricing. This is only because of the novel way of sharing profits between the government and the oil companies. This is based on internationally accepted production sharing contract (PSC) terms.
According to PSCs oil companies are at liberty to sell gas to anyone in India, but the price should be on arms length basis. Since Indian gas market is not well developed, assessing the credibility of prices is not easy. The government is finding it difficult to develop a proper mechanism to satisfy different stakeholders since a huge amount of money is involved.
Reason for loss
However in the case of oil fields where ONGC has large percentage of gas production, gas prices are still controlled by the petroleum ministry and not by market prices. It is this little known and totally non transparent process that may result in potentially huge losses to the government.
Fortunately 70 per cent of the customers are in the sector where their output prices are regulated. For example power and fertilizer sectors receive about 70 per cent of the total gas production and both these are highly regulated. Thus what is a loss to the petroleum sector is a gain to the power and fertilizer sector. But one can only imagine the tremendous distortion in the market place caused by such a pricing policy.
For example India has the option of either importing lower cost urea from the West Asia or higher priced LNG. In the West Asia, where gas supplies are plentiful, it costs less than $1.00 per mmbtu to produce urea. As a result India can import urea at a lower price from the Middle East.
The prevailing distorted gas prices in India diverts gas production to manufacture urea in a fertilizer factory which cannot afford to pay market related price. ONGC is forced to sell gas for about $2.50 per mmbtu to fertilizer factories. This deprives some other industry which can afford to pay a higher price.
Such industries are forced to import LNG paying a price as high as $8.50 to 9.00 per mmbtu. Only freeing up the gas sector from bureaucratic interference can prevent such distortion. It will also result in healthy development of the gas industry in India.
