Business Today

The gas pricing circus

Finally, the government is closer to fixing price for gas from RIL.

By Balaji Chandramouli        Print Edition: Sept 23, 2007

Early this month, the government patted itself on the back for having tweaked its behemoth machinery and made it more business friendly.

Apparently, the time taken for clearances to set up a business has come down from 305 days to 166 days. Ironically, around the same time, the largest company in the country and one that has excelled in government-controlled sectors like petroleum continues to struggle (as we got to press) to get its gas business off the ground.

And, although a favourable resolution is in the works, fact remains it has already spent over 120 days (informal and formal consultations with the government) in getting a statutory approval for the price at which it plans to sell gas from its gas field off the coast of Andhra Pradesh.

And, the turning point is nothing less than the view of a short Cabinet, an Empowered Group of Ministers (EGOM) headed by Defence Minister Pranab Mukherjee. The EGOM was convinced of the case put forth by the Petroleum Minister Murli Deora on August 27 as to why RIL's gas price proposal ought to be approved, with minor alterations.

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The question then is, was it any superior to the arguments made in defence of RIL's proposals over the last four months? Yes. Here's how: The Petroleum Ministry pointed out that the three key aspects of the production sharing contract between RIL and government-gas pricing policy, gas utilisation policy (GUP) as well as freedom to market gas-hold together and don't displace any one of three.

So, where was the trouble all this while if it simply meant reading out the contract? It all began when Petroleum Minister Murli Deora, who was well within his rights to take a call on the price, decided to diffuse the decision making process at a bureaucratic level-he referred the gas pricing issue to the Cabinet Secretary K.M Chandrasekhar.

The Cabinet Secretary's interpretation of the contract clearly sought to forsake two of the three pillars of the contract-the freedom to market gas and pricing policy. In his report, he argued for sectoral allocation of gas, in line with the arguments put forth by the ministries representing the interests of the large consumers-power and fertilizer. However, this interpretation of the GUP left out any scope for marketing freedom.

As regards pricing policy, the Cabinet Secretary argued in favour of a policy that sought to balance the interests of the producers and consumers, clearly trashing any sense of open market pricing, and which again curbs marketing freedom. Not surprisingly, the Cabinet Secretary did not attend the second meeting of the EGOM on August 28.

There was less confusion generated from Murli Deora's other move during this period-a reference to the Prime Minister's Economic Advisory Council (EAC). The EAC did not argue for state intervention in gas allocation or pricing but pointed to the non-transparent manner in which bids were called by RIL and sought fresh bids. At the same time, it broadly found the price to be in order.

For RIL, one thing is near certain-the government will not tamper significantly with the price at which it seeks to sell gas. Therefore, it may well get the price of $4.3 per mmbtu (million british thermal units) that it has been fighting for. However, there are legacy issues that are pending with the courts-the deal to supply 12 mmscmd (million metric standard cubic metres per day) of gas to power major NTPC and another 28 mmscmd to Anil Ambani-promoted Reliance Natural Resources Ltd (RNRL) at a price close to 40 per cent lower than the price it hopes to sell at. Worse, together, the two deals represent nearly half the peak volume that RIL will produce from its field.

NTPC's case for gas, at present pending in Mumbai High Court, was taken up at the EGOM not only by Power Minister Sushil Kumar Shinde, but also Fertiliser Minister Ram Vilas Paswan, fuelling speculation that an out-of-court settlement for RIL to honour the NTPC deal could be part of the EGOM decision.

Evidently, the play-out of the RIL gas pricing issue could well have been less protracted had the bureaucracy realised at the beginning that the entire issue is a technical matter relating to a poorly drafted contract. Moral of the story: For the next round of exploration block auctions, the production sharing contract ought to be drawn up afresh.

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