The government has finally bowed to the demand of gas producers, who will get a price of $8.4 per million metric British thermal units (mmbtu) of gas. This price was suggested by the Rangarajan Committee, which reportedly arrived at the figure via a calculation method that included prices at trading hubs like the US’ Henry Hubb, UK’s NBP and the net back price of Japanese LNG imports.
Why the government should use all these foreign yardsticks to price something which is produced domestically, and is its own natural resource, is inexplicable. Seventy per cent of the country’s gas requirement is produced domestically and 30 per cent is imported.
This doubling of the gas price will certainly boost the bottom line of gas-producing companies like ONGC, Oil India and the largest private sector producer, RIL, which had, coincidentally, asked for this same price two years ago. The new price comes into force in April 2014.
The government hopes this hike will draw foreign investment into the exploration sector and also investment by domestic players. Foreign investment had been falling over the years — from $4.7 billion in 2010 to $1.8 billion in 2012. In fact, there had been little or no takers for new blocks. Even RIL had demanded a hike to $8 per mmbtu nearly two years ago to enhance production in the KG-D6 basin, where output had dwindled.
The government has yet to consider this impact on the power and fertiliser companies, the power distribution companies, and finally the end consumers. According to Crisil Research, the government’s urea subsidy burden is expected to increase by `9,000 crore in 2014-15. What this will do to the government’s control over its fiscal deficit can only be imagined. Inflation, too, will be a source of concern.
It is hoped that the government will see to it that gas producers start producing gas within a certain time frame and not let down the government and the country. It is imperative that the government give up its cavalier attitude towards coal-based methane gas, projects for which have not taken off since 2006 or so in Madhya Pradesh, Andhra Pradesh and Rajasthan. The Centre should also incentivise the widespread use of solar power with 100 per cent depreciation, wind power, and even gobar gas, of which there is plenty in India. There is a shining example of a power plant running purely on gobar gas in Rajasthan. The government may also consider removing the high tax on hybrid cars as another measure to remove the pressure on import of oil and gas.