<div>Like any other commodity, gas can be bought by different consumers at different prices. The question: “What should be the price of gas”, therefore, has more than one answer. The buyer who will replace LPG fuel with gas will be ready to pay a much higher price than one who wishes to replace coal with gas. If arm’s length price of gas is to be discovered by the market at the highest affordable gas price, there will be few buyers, with limited offtake. At lower prices, there will be many more buyers with much higher volumes.<br /><br />Price is controlled with the intent of servicing consumers with low paying capacity. If that controlled price is applied to sectors with higher paying capacity, it leads to unjust enrichment of buyers on one side and acts as a disincentive for gas producers, on the other. Both are undesirable outcomes. <br /><br />Gas has the potential of displacing liquid and solid fuels in almost all fuel and feedstock applications. In India, where the service sector contributes over 50 per cent to the GDP, it is technically feasible for almost 60 per cent of energy needs to be met by gas, subject to availability. However, India is yet to exploit this potential owing to lack of availability of both domestic and imported gas.<br /><br />India’s gas consumption in 2013 was around 51 billion cubic metres (bcm). That was around 8 per cent of the total commercially traded primary energy consumption. In 2006, when the Planning Commission conducted the last detailed exercise, the consumption of primary energy in 2031-32 was projected to be between 1,800 and 2,000 million metric tonnes of oil equivalent (mmtoe). Concurrently, according to another independent study conducted by PricewaterhouseCoopers under the aegis of PetroFed, gas demand in the same terminal year was projected to be between 243 and 405 bcm. For ready reference: 1 bcm is approximately equal to 0.9 mmtoe. That means in 2031-32, India is projected to possess gas demand of about 20 per cent of primary energy demand. This analysis assumed supply to be unconstrained, but business as usual on policy and infrastructure fronts.<br /><br />If “forced” gas (a terminology coined by the Planning Commission) policies are promoted by the government, sourcing, production, pipeline infrastructure, pricing policies and fiscal incentives will be taken by it in favour of supply and consumption. In such a scenario, gas demand as a percentage of primary energy can be higher. <br /><br />In 2013, primary energy in Iran was serviced up to 60 per cent by gas, in the US it was 30 per cent, in the UK 33 per cent, Japan 22 per cent and in Germany it was 23 per cent. These nations have experienced benefits of gas as a fuel while India saw a decline in gas consumption in the last four years. <br /><br />The very interplay of prices and availability of various forms of primary energy, including hydro, nuclear and renewable, decide the share of a particular energy type. In India, the costliest liquid fuels such as petrol and diesel are easily available to consumers, thanks to the freedom to import crude. Moreover, challenges in coal and gas production have made liquid fuel the compulsory choice for businesses and consumers. De-bottlenecking domestic gas production and allowing market and price freedom will help industries cut dependence on liquid fuels. Refineries use crude residue as fuel. Industries such as ceramic and pharma use LPG in heating applications. The transport sector uses gasoline and gas oil. All these sectors can make savings even if gas priced on a par with imported LNG is used. <br /><br />Arguably, domestic gas producers tapping these affordable sectors to market gas and, in turn, generating capital for further exploration of oil and gas would do no harm to stakeholders. Providing an opportunity to develop domestic oil and gas production will have unparalleled upsides. The resultant reduction in crude imports will save foreign exchange, stem trade imbalance, help manage fiscal balance, provide infrastructure development-related impetus to the economy and help manage the carbon footprint. <br /><br />Power, fertiliser and domestic cooking fuels are often mentioned as sectors that cannot afford costly gas. The incremental demand for urea and the domestic fuel market may range from 10 to 20 bcm in the next 5-10 years. For the sake of debate, one can propose that such a relatively small demand be met by costly gas and the payment of subsidies at the consumer end. The profit from petroleum gas (in kind or cash), the additional royalty, the incremental taxes paid by gas producing firms (together referred to as government take in exploration and production parlance) will make up substantially, if not fully, for the subsidies in a high gas price scenario, thereby reducing the exchequer’s burden. That is because investments and production have a better chance of growing over the years with the promise of import-parity-price-linked offtake of gas. With higher gas production, ad valorem components of the government’s take will be more. <br /><br />In countries with low-risk hydrocarbon finds, investors are inclined to invest with lower margin expectations. In India, hydrocarbon prospecting is yet to be fully established. Similarly, availability of underground data is a challenge. Investors cannot assess the underground risks in the absence of adequate data. It will, therefore, be hard for them to come in with low prices of gas or oil.<br /><br />The question that remains unanswered is: how we will decide the price of gas. How about letting consumers decide the price? The ceiling on gas prices comes from competitive fuels like crude and coal. They act as natural barriers to unreasonable pricing. Should gas production grow beyond requirements, producers will be forced to pare prices as consumers will have alternatives. The possibility of monopolistic behaviour is much less and, hence, consumer interests will be protected.<br /><br />Such a scenario was envisaged when, under former petroleum minister Ram Naik, the New Exploration Licensing Policy (NELP) was flagged off with a round of E&P acreages put on auction in 1999. The policy provided for selling gas at competitive arm’s length prices. Under such a mechanism, the government also envisaged the need to oversee pricing using a methodology and the services of a regulator. <br /><br />In the past, views have also been expressed on making gas available at low prices to sectors that cannot afford competitively determined arm’s length prices. Those views hold good only when gas is available. Until that happens, gas prices ought to reflect their true economic value. <br /><br /><em>The author is director and leader, oil and gas industry practice, PwC India. Vivek Bhatia, manager, PwC India, contributed to this article</em><br /><br />(This story was published in BW | Businessworld Issue Dated 08-09-2014)</div>
