Then the question comes, why explore gas domestically, if it entails a
cost higher than global exploration costs. Here the Ministry's logic is
the huge outgo on foreign exchange (oil and natural gas is our number
one .
By Sreekumar Raghavan
As some one who has been following the developments in natural gas sector from an 'arms length' and the number of columns written by people who are not really experts but mostly laymen using some logic to come to a conclusion, I wouldn't be surprised if you get the facts right on this issue. Most of us either end up on the side of Kejriwal or hardcore UPA supporters the oppoiste.
In fact Dr C Rangarajan, a distinguished economist and former Governor of Reserve Bank of India (RBI) who didn't have anything to do with natural gas or crude oil headed a committee under the Prime Minister's Economic Advisory Council (EAC) to study the problems related to pricing of natural gas in India.
The Oil and Natural Gas Ministry seems to have partially adopted the
recommendations of the committee and also based on Comptroller and
Auditor General (CAG) reports, has come out with a new pricing formula
effective from April 1, 2014. But nowhere does it mention that prices
would rise to $8 per MMBTU (million British Thermal Units). Instead it
is based on a formula that averages the prices that producers in other
regions of the world and exporting centres get on a quarterly basis and
that value is used to arrive at the domestic gas price in India.
A notification of the Ministry of Petroleum and Natural Gas dated
January 1, 2014 states that prices applicable for domestic gas producers
will be calculated on the basis of following methodology:
- The netback price of all Indian imports at the wellhead of the
exporting countries will be estimated. It will be a weighted average pf
such netback of import prices at the wellheads represent the average
global price for Indian LNG imports.
Secondly, weighted average of prices prevailing at trading points of
transactions – i.e., the hubs or balancing points of the major global
markets will be estimated. For this, (a) the hub price (at the Henry
Hub) in the US (for North America), (b) the price at the National
Balancing Point of the UK (for Europe), and (c) the netback wellhead
price at the sources of supply for Japan will be taken as the average
price for producers at their supply points across continents.
-Finally, the simple average of the prices arrived at through the
aforementioned two methods will be determined as the price for
domestically produced natural gas in India.
This is the formula: PAV = (PIAV = PWAV)/2.
As per this notification, there is no reason to assume that prices
will double to $8 per MMBTU as the variables are international prices
and they have usually moved in a narrow band with markets presently
bullish on colder weather in USA and Europe.
The Rangarajan Committee and the Petroleum and Natural Gas Ministry
have put forward some objectives behind this pricing formula.
1) India doesn't have a domestic price for natural gas as it is mostly imported. This applies to crude oil too.
1) India doesn't have a domestic price for natural gas as it is mostly imported. This applies to crude oil too.
2)If India needs to enable energy security there needs to
incentivisation to domestically explore the sources of natural gas.
Hence this pricing formula which Kejriwal and co says would push prices
to $8 per MMBTU
3) There is a reasonable basis to assume that India's production cost
would be higher compared to other nations which have reached an advance
level of exploration and mining of natural resources.
Then the question comes, why explore gas domestically, if it entails a
cost higher than global exploration costs. Here the Ministry's logic is
the huge outgo on foreign exchange (oil and natural gas is our number
one guzzler of foreign exchange and therefore a major contributor
increasing Current Account Deficit, apart from gold).
There are several issues related to Production Sharing Contracts and
royalty payments, cost recoveries under NELP contracts which is beyond
the scope of this column. The saddest part is that energy experts
haven't really commented on the issue so far.
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