Business Today

Inert state

Anilesh S. Mahajan | Print Edition: May 27, 2012

Five years ago, Prashant Modi, President of Great Eastern Energy Corporation (GEECL), announced that his company had begun to extract coal bed methane (CBM) from its Raniganj (South) block in West Bengal. It was a small find, but a giant step forward in harnessing a source of energy that was hitherto untapped in India. Methane is the main energy source in natural gas and CBM is simply methane found in coal beds. Many countries have been using it for years to meet their energy needs. The Raniganj find promised to drive more such discoveries across India, and ultimately ease the country's energy burden. According to the Directorate General of Hydrocarbons, India is estimated to have around 4.6 trillion cubic meters (168 trillion cubic feet) of CBM reserves. One TCF of natural gas is enough to generate about 100 billion kilowatt hours of electricity. Suddenly, CBM was the next big thing for India's energy sector.

Cut to 2012, however, and the picture is dismal. Of 33 CBM blocks allocated, only one is producing gas. There have been discoveries in three others but commercial production has been delayed over pricing of the gas. The rest have either been relinquished because of technical and land acquisition issues or are awaiting clearance and are yet to commence exploration. As things stand, only 0.24 mmscmd (million metric standard cubic metres per day) of CBM is being produced today, from one block. One mmscmd can fire a 220 megawatt power plant for a day.

The abysmal output is not because there is no CBM to be found. Rather, it is the result of flip-flops in policy and delays in decision making. In India, gas is sold under two regimes: administered price mechanism (APM), where the price is fixed by the government, and free pricing, which includes gas produced within the country as well as imports of liquefied natural gas (LNG). In 2001, when it was formulated, India's CBM policy was praised for being forward-looking. In an effort to encourage exploration, operators were allowed to market the gas and fix its price. The idea clicked: many companies bid for and won CBM blocks.

A year after GEECL made its gas find in Raniganj, however, the first policy wrinkle appeared. The government, reacting to a tight energy situation, decided that a few priority sectors, including fertilisers and power, would get first right over domestically produced gas. Although it was still in place, the free pricing rule had been effectively rendered meaningless.

The heavily subsidised fertiliser sector best embodies the pricing fiasco. Currently, natural gas is supplied to the sector at $4.2 per unit under the APM regime. Buying CBM at a higher price would only increase the input cost of the fertiliser sector and push up the government's subsidy burden. "Why will a fertiliser company bid for more when it is already getting priority allocation from APM gas," asks one industry executive.

"If I sell the gas for more, the government will get a bigger share out of it. And there are buyers who are willing to pay more," says GEECL'S Modi.

Essar discovered CBM in its Raniganj (East) block in 2011. Reliance Industries Ltd (RIL), too, made a discovery in its two blocks in Sohagpur, Madhya Pradesh, last year. Both operators are now awaiting clearance from the government, albeit on contrasting pricing applications. In September last year, Essar asked the Ministry of Petroleum and Natural Gas to clear its pricing for its only CBM customer, Matix Fertilisers and Chemicals. Matix is promoted by Nishant Kanodia, son-in-law of Essar Group co-promoter Ravi Ruia. Essar wants to sell its CBM to Matix at $5.25 per mmBtu (million metric British thermal unit), of which $1 is for transportation. A similar quote also came from state-owned natural gas distributor, GAIL.

Since Matix is a fertiliser company, there should have been no issue with the request. But Essar is yet to get clearance for its pricing. "A lower price would also reduce tax collection from the sale of gas," says an officer from the Petroleum Ministry, explaining the dilemma. RIL, too, submitted a price formula for sale of the gas from its Sohagpur blocks in September 2011. It cited the $12-14 per mmBtu price at which state-owned Petronet LNG is importing liquefied gas from Qatar-based RasGas. The LNG is distributed though the Hazira-Vijapur-Jagdishpur pipeline, in approximately the same market that RIL is targeting. Company officials believe that the market has absorbed the $12-14 LNG price, and they should therefore be able to sell the CBM from Sohagpur at the same price.

RIL wants to charge $13 mmBtu for the gas. Last year, it even offered to buy the entire CBM output for its petrochemical units in neighbouring Gujarat at the LNG price. However, the ministry rejected this proposal. "In the current scenario, it is difficult to clear two prices for the same gas," says a ministry official.

The CBM segment has also been hit by delays in decision making. In August 2010, a month after bagging two CBM blocks in a fresh round of auctions, Arrow Energy , an Australian gas explorer, was taken over by 50:50 joint venture of Shell and PetroChina. The company's international assets, including those in India, were hived off into DART Energy, a new entity. DART has sought to amend its production sharing contract to reflect the new name but is yet to get clearance. "We are inquiring into the shareholding pattern of the company," says a ministry official.

The oil ministry wants to ensure there is no Chinese holding and the matter has now been referred to the Home Ministry, for verification by intelligence agencies. DART, meanwhile, has been unable to commence work. The manner in which the government has tied itself in knots over the CBM policy is reminiscent of similar developments in microfinance and insurance. Initially, controls were loosened. Subsequently, some controls, which distorted the original policy, were introduced to deal with an immediate problem. Eventually, contradictory policies undermined the development of the market. The CBM industry is in danger of going the same way.

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