<div>The NDA government’s decision to price natural gas lower than what the UPA government had agreed upon has many layers to it. The price of $5.61 per million british thermal unit (mmbtu) — eligible for revision every six months — is applicable to existing fields that are onshore.</div><div> </div><div>So, gas produced from deep, ultra-deep and other high-pressure areas would get a premium, which has not been decided yet.</div><div> </div><div>As a consequence, companies like RIL that operate in deepwater blocks will command a higher price for their gas compared to others. This will apply to new production from the KG D6 block.</div><div> </div><div>It’s a tricky situation as it gives no incentive to RIL to produce more from its controversial blocks — D1 and D3, which failed to reach the proposed gas production level of 80 million metric standard cubic meters per day by 2012. The company will have to sell gas from these two fields at the previous price of $4.2 mmbtu until the resolution of the arbitration.</div><div> </div><div>However, it gives RIL incentive to produce from other fields where production has not begun yet. RIL had made 19 discoveries in the KG D6 basin, of which 18 were gas finds and one was an oil block. Of these, the company is producing gas from only two fields, the rest are under development. In the absence of any clarification from the ministry, the clause on a premium for deepwater blocks makes RIL eligible for a premium over $5.61 per mmbtu. </div><div> </div><div>The idea of a premium on gas from difficult terrains, however, should not turn into a way for companies to make more money. They should not stop trying to bring down the cost of production from such fields.</div><div> </div><div>The production sharing contract — signed between gas companies and the government for the New Exploration and Licensing Policy — had a clause on arm’s length pricing for gas, which essentially meant deciding on a price at which two unrelated and non-desperate parties would agree to transact. The mechanism promoted real competition in the market where sellers were incentivised to keep production costs low.</div><div> </div><div>In the absence of any such binding contract, the government should look at the cost of production to arrive at the quantum of premium to be given to the producer of gas. It should verify the investments that explorers claim to have made to start production. </div><div> </div><div>The government in mature economies, however, plays no role in deciding gas price. But since it is deciding for India, it should ensure that only companies that invest large amounts in gas fields, get a premium over their investments. </div><div> </div><div>(This story was published in BW | Businessworld Issue Dated 17-11-2014)</div>
