Gas sharing contract: The way to protect public interest

The world class Krishna-Godavari basin gas production should have heralded a new era in gas utilisation in India. Instead, it has turned into a political game because of the dispute between two brothers and their business rivalry: Mukesh Ambani’s RIL and Anil Ambani’s RNRL.

At this point in time, people are unable to assess if the government is taking the correct measures to protect the national asset. There’s a perception that the petroleum ministry favours one of the brothers, while petroleum and power ministries seem to be at loggerheads. The Left parties want the government to take over the distribution and marketing of gas.

So, what should the government do in pubic interest? First of all, the petroleum ministry should assemble the best expertise available on Production Sharing Contracts (PSC). Properly negotiated PSC incorporating the best international practices will give equal protection to the investors and the government.

When the Director General of Hydrocarbons (DGH) states that gold plating the investment does not help the investors, it betrays the lack of understanding on the part of the agency which should protect tax payers’ interest. Since PSC allows complete recovery of the cost, every investor has incentive to gold plate the investment.

While the petroleum ministry is rightly unhappy with the low price demanded by RNRL, the power ministry wants the public sector National Thermal Power Corporation (NTPC) to intervene in the Supreme Court case and thus indirectly support Anil Ambani. NTPC is able to pass on all the costs to consumers because of energy regulatory act and will not suffer.

Since the tax payers are the ultimate winners when gas commands international price (once the investor recovers his cost, the government starts getting larger share of the gas profit), it is not rational for the power ministry to intervene. Why is the power ministry fishing in troubled waters?

The cost to produce gas from KG basin is only about $0.84 per million British Thermal Unit (mmbtu). On this basis, mostly leaders belonging to political parties on the Left are insisting on a lower administered price independent of international market. Such low prices will benefit only a tiny section of the consumers (in comparison to the whole of India) whereas some industrialists who have access to the cheap gas will have incentive to divert it to uses where they can earn huge revenues. In fact, currently many industrialists are beneficiaries of such an irrational gas pricing regime.

Not to affect imports

Currently, India’s oil import dependency is more than 72 per cent and it is forecast to increase. Despite huge KG discovery, India’s gas imports will also increase. Since a majority consumers depend upon imports, they will pay international prices. How can we justify the implicit subsidy by having a lower price for KG gas?

It is worth observing that when KG gas belongs to the whole of India, the way pipeline system has been developed and KG gas contracts are signed now, Karnataka, Kerala, Tamil Nadu, etc may not even get any gas from that basin and they will be forced to pay international price for imported LNG. Is this justified? Why are MPs from these states not raising any objections in the Lok Sabha?

RNRL claims that $2.34/mmbtu was ‘discovered’ during an international tender floated by NTPC. Is this a credible tender just because a PSU is involved? RIL’s bid was the lowest while competing bid by foreign oil companies such as Petronas, Shell were higher at $4.23/mmbtu. Let us assume that instead of NTPC, RNRL or some private company had floated the tender, and RIL bid just $1.00/mmbtu (still higher than its cost), should the government accept such a low price? Is this a credible way of discovering the price in a transparent way?

The international gas industry has learnt two lessons over the years. These are: Never to sell gas at a fixed price and also for a longer time. Since gas prices are tied to oil prices which are difficult to predict, it is not prudent to fix gas price. Indian government should argue vigorously to reject such low price contracts.

The Indian government should look at the announced gas use policy. The present policy lists priority gas recipients as existing fertiliser, liquefied natural gas, petrochemical and power plants, followed by city gas distribution projects and refineries.

In the developed world, the residential gas sector commands the highest price and was considered as noble use. During the gas shortage periods, they even banned use of gas for power sector. Is there a LPG lobby working against the promotion of gas for residential use? Gas should not be given on a priority basis for new or inefficient fertiliser companies.

Finally under PSC, when the investor assigns the rights to gas reserves indirectly as happened, though through a private deal between RIL and RNRL, they have to get prior permission from the government. If no such prior permission was given then the government has every right to null and void the original contract itself. With so much at stake, it is time to keep aside the politics and implement the PSC in true letter and spirit.

(The writer is an internationally known energy expert)