NATURAL GAS PRICE INCREASE
ROBBING PETER AND PAYING PAUL
At present, of the total availability of natural gas of 140 mscmd (million standard cubic metres per day), APM gas constitutes 55 mscmd. Of this, 24.5 mscmd is being supplied to the power sector.
Price of administered price mechanism (APM*) gas has been increased by Government of India.
APM gas refers to gas produced by ONGC and Oil India who were awarded gas fields prior to the PSC (Production Sharing Contract) regime without competitive bid. The price of gas from these fields is administered by Ministry of Petroleum and Natural Gas. The power and fertiliser sectors, small consumers having allocation up to 0.05 mscmd and consumers drawing gas under Supreme Court orders are given priority for supply of APM gas.
ONGC and Oil India Ltd (OIL) can now sell gas from the fields given to them on a nomination basis at $4.2 per mBtu, on par with the price of Reliance Industries Ltd's (RIL) Krishna-Godavari Basin field gas. This would help the oil companies recover the cost of operation.
The fields of ONGC and OIL are mature and ageing. Hence, substantial expenditure is necessary to maintain their gas production. On an annualised basis for ONGC, the price increase would mean gas revenues will go up by Rs 5,400 crore and net profit by Rs 3,200 crore.
The customers from the North-East, however, would get a subsidy of 40 per cent.
Apart from the gas price increase, the Government of India has also allowed GAIL (India) Ltd to levy a marketing margin of Rs 200 per thousand cubic metres (11.2 cents per mBtu) of natural gas. Earlier, GAIL was not allowed to levy marketing margins on APM gas.For compressed natural gas, it would mean price increase of 20 per cent depending on the city and the company.
* The new price of APM gas is fixed for four years
* Prices of APM and KG gas will be revised simultaneously in 2014
Impact of price increase on power cost
Gas-based power plants drawing APM gas supply power mainly to north Indian states such as Haryana, Punjab, Delhi, Gujarat, J&K, Rajasthan and Himachal Pradesh.
APM gas is largely used by central utility National Thermal Power Corporation (NTPC) that runs seven of its power plants (excluding RGPPL) with a total capacity of 3,955 MW on APM gas. Against a requirement of 16 to 17 mmscmd of gas, NTPC sources 8 to 9 mmscmd of APM gas for its plants at Anta, Auraiya, Dadri, Faridabad, Kawas, Gandhar and Kayamkulam. It also gets gas from RIL’s KG D-6 block and through spot purchases.
The APM gas price hike will raise electricity generation cost of gas-based power utilities by 90 paise to Rs 1.20 per unit (Kwh). The ultimate loser due to the government’s decision would be the consumers who will have to pay more as electricity charges coming from gas based stations. The final price of electricity for consumers will be marginally higher subject to price formula worked out by distribution companies and approved by regulatory commissions which may go upto Rs.1.5 per unit.
Impact of price increase on fertilizer sector
Natural gas is used as feedstock in urea manufacturing. Of the total urea production costs, gas price (APM and other sources) accounts for an estimated 70%. Urea manufacturing cost for pre-92 gas based plants, at prevailing APM gas price, is estimated at Rs 5600 per metric tonne.
For mixed feedstock plants, costs are estimated at Rs 7000 per metric tonne.
APM gas is used as a feed-stock as well as a fuel in fertilizer units. The price increase of APM gas will lead to the increase of cost of production of urea fertilizer proportionately.
Since urea is the only controlled fertiliser at present, the additional cost due to increase in APM gas price between its actual manufacturing cost and the retail price has to be borne by the government and not by the urea fertilizer industry. Urea is currently retailed at a controlled rate of Rs.4830 per metric tonne, and the Government of India has to subsidise the difference.
Even after the price increase of APM gas, the retail prices of fertilizer will remain the same but the government will pay Rs.24000 to 30000 million more on fertilizer subsidy
Concern of the urea industry
The move to increase the price of APM gas has raised apprehensions in the fertiliser sector, especially since APM gas meets 45% of the total gas needs of the sector.
While the fertilizer industry fears bigger problems on timely recovery of subsidy from the Government of India in the short term, it perceives high and market-linked gas price pushing up urea production costs inordinately in a deregulated environment in the near future.
The price increase of natural gas would boost input prices for urea manufacture and increase industry problems in reclaiming the subsidy or concession.
At any given time, several months worth of subsidy payments due to industry are stuck in the government’s pipeline. The Government of India has been unable to clear all the dues to industry in the running fiscal for the last three years and has carried over huge amounts into the next year’s subsidy bill.
Impact of price increase on transport oil
In cities like Mumbai and Delhi, 80 to 90% APM gas is used as domestic and transport fuel.
Fuel cost for automobiles and households may go up by 20 to 35% depending on cities.
The Government’s change of approach
The pricing of APM gas at the same level as Reliance gas is signalling the new benchmark price for all gas, irrespective of source.
There is bound to be an impact of the gas price hike in a de-regulated environment. Once it becomes fully de-regulated two or three years down the line, benchmark market-linked gas price will account for a big part of urea production costs.
Robbing Peter and paying Paul
It is extremely difficult to understand the logic of Government of India in increasing the price of APM gas, which would result in increase in the cost of production of fertilizers.
As the Government can not increase the retail price of fertilizer as it would affect the agricultural operations, it has to necessarily extend the subsidy of around Rs.50,000 million to fertililiser industry after increasing the APM gas price.
The question is as to why not the government give the subsidy of Rs.50000/- million straightaway to ONGC and Oil India , instead of increasing the price of APM gas and destabilizing the price mechanism of the fertilizer industry and upsetting the power industry which is sensitive issue with far reaching significance.
The Government’s move is just like robbing Peter and paying Paul. This would lead to cost push inflation through increase in gas price as well as fuel and power cost. This would not help public interests. This also indicates the government’s mindless reversal of it’s policies and committing itself to the methods of capitalist economy , without bothering about the ground realities in India.