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Need for a rational policy

A recent judgment of the Bombay High Court upholding the plea of Anil Ambani’s Reliance Natural Resources Ltd. (RNRL) against Mukesh Ambani’s Reliance Industries Ltd. (RIL) for the supply of gas from the Krishna-Godavari basin brings into focus the major lacunae in the official policy on natural gas. The court has asked RIL to supply 28 mmscmd (million metric standard cubic metres per day) of gas at the agreed price of $2.34 per mmbtu (million metric British th ermal units) for 17 years and not at the $4.20, the price claimed by RIL and approved by an empowered group of ministers as the floor price in 2007. Although the court has left room for an out-of-court settlement, there could well be protracted litigation, if all remedies fail. RIL, especially, has a great deal to lose: a case filed by the NTPC asking RIL to supply gas at the tendered price of $2.34 per mmbtu is still to be decided. The significance of the judgment goes far beyond the commercial interests of any one company. The public policy on pricing and utilisation of natural gas has been ad hoc and opaque. The government did not follow international practices which involve one of the following: an open bidding process, a cost-plus method, or an indexation of oil prices. Instead it made a hash of price discovery of natural gas by combining all the three methods, resulting in the final price of $4.20.

One consequence that should have been anticipated is the high cost of natural gas in India compared to global prices. The high floor price has raised the cost of energy. The key user industries, many of them in the public sector, have shown some reluctance to sign power purchase agreements with the producer despite government persuasion. The gas allocation policy has also suffered because of the frequent modifications made by the government in the draft announced in 2007 determining the allocation of the first tranche of 40 mmscmd of gas from RIL’s D6 block of the KG basin. Government’s priorities have tended to vary with every revision of the draft policy and the user industries including power, fertilizer, and LPG have suffered because of the uncertainty. In this uncertain milieu, RIL on its part has scaled down its production to 26 mmscmd and has complained to the government that it is not finding buyers. Total gas production in the country is slated to go up sharply from 80.54 mmscmd in 2007-08 to 200 mmscmd and more in 2011-12. The absence of rational policies relating to pricing, allocation, regulation, and infrastructure-building in the natural gas industry is clearly retarding the gas and several related industries.

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