Natural Gas Pricing: Reaping of Super Profits

The empowered group of ministers (eGoM), headed by the minister of external affairs, Pranab Mukherjee, has set a steep “floor price” of $ 4.2 per million metric British thermal units (mmbtu), only slightly lower than the $ 4.33 per mmbtu proposed by Reliance Industries (RIL) for natural gas from its D-6 block in the eastern offshore Krishna-Godavari basin. RIL’s pricing formula, adjusted by the eGoM and expressed in $ per mmbtu, has three components – the first, an essentially fixed component set at $ 2.5 per mmbtu (which is itself higher than the price that ONGC gets for its natural gas under the administered price mechanism), the second, a way of setting the linkage with Brent crude prices, and the third, a premium in the form of a positive integer to be quoted by the bidder. The agreed price of $ 4.2 per mmbtu is the sum of the first two components only; the value of third component, the biddable one is subject to actual quotations in open bidding. All that the eGoM did was a bit of tinkering with RIL’s pricing formula: it removed the exchange rate component (RIL’s pricing formula was expressed in rupee terms) and lowered the ceiling of the Brent crude price band from $ 65 per barrel to $ 60 per barrel. But given that Brent crude oil prices are not expected to fall below $ 60 per barrel over the medium term, and that the positive integer to be quoted by the bidder stands, RIL and the multinational oil companies have been assured more than enough of a pecuniary incentive to bid in the forthcoming rounds of the new exploration licensing policy (NELP). For the users of natural gas, mainly the power and fertiliser industry, and the peasantry, for whom electricity and urea are a significant component of their costs of cultivation, the high “floor price” is an ominous signal, for the eGoM’s decision will most likely set the norm for pricing of natural gas from other deep water blocks covered by the NELP.

The union ministers for power, chemicals and fertilisers, and agriculture, who were also part of the eGoM apparently endorsed the fantastic claim being made that the price they have agreed upon balances the interests of the producer, RIL, and the customers, the power and fertiliser companies, and, in turn, the end users, the country’s peasants. The government, it seems, is more concerned about meeting the demands of private investors in exploration and production than the needs of a crisis-ridden Indian peasantry.