RIL gas price -- Modi Raj's first test for mass or class identity

The euphoria of power is over.  For the Narendra Modi led BJP Government the moment of truth has arrived, even as corporate lobbyists masquerading as media mount pressure for hiking the price for natural gas.

Ahead of budget 2014-15 there clearly is a deep sense of foreboding, although so far the BJP government has refused to relent to pressure. The proposal to hike gas prices from the Reliance Industries operated Krishna Godavari Basin well number 98/3 (Reliance calls it D6) is on hold for three months till the Rangarajan committee's specious pricing formula is reviewed. The committee's formula made in 2012 recommended gas prices be raised to $ 8.4 per million british thermal units (MMBTU).*¹ That committee's formula was based on the average of the prices of imported Liquiefied Natural Gas into India and the 12 month weighted average of gas prices in North America, Europe and Japan. 

The high prices of natural gas if conceded would in turn have a cascading effect across all sectors. India's gas requirement is about 350 million cubic metres per day. RIL's KG-Dwn98 output in 2013-14 was 178.3 billion cubic feet (5 billion cubic metres), 50 per cent less than previous year. Under the production sharing agreement, RIL's expected output was 80 million cubic metres per day. The actual output is now only 12.5 million cubic metres. The output restriction clearly appeared to be a pressure tactic for higher gas prices

The first effect would be on fertiliser prices. Fertiliser subsidy in 2013-14 was Rs 55926 crore and is estimated at Rs.67,970 crore for 2014-15. This was done on the basis of gas price assumption of $ 4.2 per mmbtu. Fertiliser plants consume about 115,632,095 mmbtu or 3191.45 million cubic metres of gas a year. A one dollar increase in gas prices translates to an increase of approximately $ 406 per tonne of fertilisers.   Therefore, an increase in gas price would naturally lead to increase in costs and lead to pressures to raise fertiliser prices or subsidies from the government.

The second effect gas price hike would be on power tariffs. India' gas based power stations of  17600 mega watts that require close to 86 million cubic metres of gas per day. The hike would mean that the fuel cost for generating a single unit of electricity would rise to Rs 1.8 from Rs 0.86. So following the pass through principle adopted in the power sector, tariffs would invariably be allowed to rise by all the electricity regulatory commissions.   

The consequent increase in fertiliser and power tariffs in turn would lead to an increase in the Minimum Support Prices (MSP) for agricultural produce. That MSP is another support to the farmer that assures minimum income. If the prices are passed on to PDS and retail food prices, then food inflation goes out of control. The Consumer Price Inflation for rural workers is already raging in double digits. Consequently, the CPI increases translates into an increase in wage bills both in government and in the private sector. So for the BJP, doesn't RILs gas price hike demand make price rise containment and fiscal consolidation a complete nonsense? Weren't these the primary electoral promises of Modi Raj?

Moreover, can domestically produced gas prices be linked to the U S dollar? Linking it to the dollar penalises domestic consumers and favours domestic suppliers to benefit from exchange rate shifts, essentially a refined form of rent seeking.  Can this be allowed especially when cost from domestic gas is in rupees? In fact this question itself was asked by the former cabinet secretary T S R Subramaniam. If the import parity pricing logic is to be applied, then all goods and services in the country would have to be invoiced in US $ !

Disinformation

But an editorial in the Hindu Business Line says the price hike is" in public interest".²! The conclusion is sweeping,"Consumers must get used to paying higher prices."  For the newspaper's editorial writer, RIL's super normal profits are synonymous to public interest! But the reality is that the editorial stance largely stems from Mukesh Ambani's corporate interests in media (or is it vice versa, after all editors are also investors in stocks including Reliance Industries Ltd).  The editorial stance,consequently completely confirms Indian media's complete departure from serving public interest. Instead, it clearly implies a sellout to corporate disinformation and abetting rent seeking.

The disinformation arguing for price increases completely ignores the fact that gas is a natural resource and a sovereign asset. Therefore, can private sector monopoly pricing of public resources a country be allowed to prevail? Then there is the fundamental question. Is RIL's gas price really in conformity with the market as envisaged by proponents of free market, like Rangarajan?

The Russia-China gas supply agreement of May 22, 2014 is a clear instance.  Gazprom, Russia's national gas company and the China national Petroleum Corporation had on May 22 this year signed a long term gas supply agreement. The agreement entailed supply of 38 billion cubic metres of gas per year at gross investment of $ 400 billion over a period of 30 years. Japan is also expected to work out a similar deal with Gazprom. Post Fukushima disaster, Japan is shifting fast to natural gas for power generation. Isn't Asia's largest buyer agreement the benchmark for market prices?

However, India's domestic media played down the Gazprom –CNPC deal. The reason for underplaying was apparent from the GAzprom- CNPC pricing. The levellised price for the entire 30 years is $9.7 per MMBTU. On the face of it, China appears to be paying a price. But that price includes the cost of infrastructure, pipelines for evacuation and transmission of the gas, for the entire contract period of 30 years.  The additional sweetener is that the gas settlement is in Russian Rubles. This is because the Ruble is a convertible currency, but far less volatile than the dollar. It became convertible in July 2006. The Renminbi Yuan is still not a fully convertible currency. The invoicing and settlement in Russian Rubles eliminate the possibility of price volatility due to exchange rate fluctuations and related disputes.

The Gazprom development is unlikely to have been missed by the Narendra Modi led BJP government. After all  the gas pricing is the first real test. A response to the gas pricing predicament is likely to define whether Modi Raj represents the masses or the classes.  The Congress government identified itself as former Petroleum Minister Veerappa Moily and former Finance Minister P Chidambaram aligned with corporate capture of government. It paid the price. Chidambaram has disappeared into oblivion. Moily is parked on the opposition bench. That political history lesson is unlikely to be forgotten soon.   

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 Notes:

1. Borrowing Lee Falk's phrase from the Phantom comic series -- For those who came in late "m" is Roman for one thousand. Therefore "mm" implies thousand thousand or one million british thermal units. In abbreviated form it is mmbtu.

2. The $ 15 per mmbtu mentioned in the editorial is misleading. It is a CIF (Cost Insurance and Freight) price and is crude oil indexed price. Stressing that price is obviously not inadvertent.  It clearly appears to make a deliberate case for RIL and in turn influence the stock values. Japan's import cost include liquefaction, shipping by from Qatar all the way up to any of the 31 regassfication terminals. Even assuming floating liquefaction and floating raegasification vessels, the costs will still remain high. In fact the Rangarajan committee did no factor in the cost of liquefaction and regassification while providing weightage for Japanese prices. Liquefaction comprises 32 per cent of the cost in the LNG chain. Liquefaction costs about $3 per mmbtu, Shipping costs another $1.5 to $ 3.5 per mmbtu and regassification costs depending on the charter arrangements, distance and vessel age. Regasification comprises about 24 per cent of the cost and adds another $0.5 per mmbtu. However, for getting gas from KG-DWN 98 none of these costs are involved. The editorial ignores these elements and passes them off as cost of gas. If this is not disinformation, what else is it?

 References :

1. Report of the Comptroller and Accountant General of India on hydrocarbons

2. International Gas Union – World LNG report

3. India government – Ministry of Petroleum and Natural Gas

4. Parliament Question – Fertiliser plant gas consumption. Lok Sabha unstarred question March 2013

5. Central Electricity Authority.  Report May 2014 

6. ITAR-Tass-- Gazprom,China's CNPC strike deal on gas supplies to China,

7. ITAR Tass -- Gazprom,CNPC agree on $25 billion advanced payment on gas contract