Congress can’t defend decision with bad math, promise of investment
The Tamil Nadu chief minister has rightly questioned the legitimacy of the Congress-led UPA government’s decision to virtually double the price of natural gas from April 1, 2014, when its mandate expires in May 2014. Logically, any decision should only be taken by the next elected Central Government.
Natural resources are a sovereign wealth of the nation and the Centre cannot allow them to be treated as individual assets. The Centre, Ms Jayalalithaa said, had created an “artificial fixing mechanism” for domestic gas production which is unacceptable, and cost of production alone should determine prices. Even Oil India has admitted that the hike was much higher than expected.
It will be in the fitness of things if the Comptroller and Auditor General (CAG) examines how much Reliance Industries Ltd (RIL), which has been holding the nation to ransom over gas production in the Krishna Godavari Basin, benefits from the Union Cabinet’s decision to double the price of natural gas from $4.2 per million metric British thermal unit (mmBtu) to $8.4 per mmBtu. The CAG scrutiny would naturally cover the presumptive loss to the exchequer from government decisions that benefit a private party.
Several important issues are involved in this unprecedented decision. To begin with, as pointed out by activist Arvind Kejriwal in October last year, Reliance Industries was permitted to extract gas from the KG basin in 2000, on the understanding that it would meet at least 50 per cent of the nation’s total gas needs. It also promised to deliver cheap gas for 17 years. Experts point out that despite failing to fulfill this obligation, the Government had taken no penal action against the company for not meeting contracted output levels.
Instead, the Centre hurriedly raised prices despite stern warnings from the Left parties. This merits close scrutiny because this is the second unprovoked act of munificence to RIL. Experts believe RIL has recovered most of the cost in KG D-6 and increased prices will only mean undue profit. So far, the company has booked 90% of receipts from KG D-6 as expenditure; 1% is paid to the government as royalty, leaving 9% as profit. RIL claims a capital expenditure of over $5 billion.
A pertinent aspect of the price issue is the fight between the companies owned by Mukesh Ambani and Anil Ambani, which the Supreme Court in May 2010 settled in favour of the elder brother.
In 2005, RIL made a deal to sell natural gas to Anil Ambani’s Reliance Natural Resources Ltd at US$ 2.34 mmBtu. It is safe to assume RIL was making a profit on this sum. In 2007, however, the then Minister for Petroleum Murli Deora (UPA-I) arbitrarily fixed US$ 4.20 per million mmBtu as the price at which the public sector National Thermal Power Corporation (NTPC) would purchase gas from RIL. As a result, RIL demanded the same enhanced price from RNRL, which went to court to protest against violation of its contract.
Shockingly, the violation was upheld by the Supreme Court, as a result of which the public sector utility was forced to pay a higher price to the private player. At that time, experts estimated that the verdict benefitted Mukesh Ambani to the tune of around Rs 23,000 crores. The dollar was then around Rs. 47; now it has touched Rs. 60. This raises questions why the Cabinet has fixed the price of Indian natural gas in dollars, when revenues are all in rupees.
The CAG will hopefully calculate how much the nation will lose to RIL with the new hike, which has introduced an element of arbitrariness in pricing policy in the crucial energy sector.
At the time of the first unjustified hike, Murli Deora had said the Supreme Court verdict was a victory of the government. Now, Finance Minister P Chidambaram claims the government was forced to nearly double gas prices due to low domestic output, increased imports of LNG, and a difficult macroeconomic situation. Chidambaram said the high gas price would attract investments in the sector, a point echoed by External Affairs Minister Salman Khurshid.
On June 14, Petroleum Minister Veerappa Moily informed the media that his ministry had recommended that the price of natural gas be increased to US$ 6.7 mmBtu. This was also the hike expected by Oil India. Yet the Union Cabinet approved US$ 8.4 mmBtu; it must surely explain the reasons for the same.
As is now well known, at the meeting of the Cabinet Committee for Economic Affairs, the Urban Development Minister Jaipal Reddy, Rural Development Minister Jairam Ramesh, Chemicals and Fertilizers Minister Srikant Jena and Power Minister Jyotiraditya Scindia, strongly opposed the hike proposed by the Rangarajan Committee. Reddy, who was shunted out of the Petroleum Ministry for resisting price increase, said that the Government had never made any attempt to calculate the cost of gas production, and that this alone should determine price.
User ministries like power and fertilizers protested that the cost of generating electricity could rise from Rs. 2.93 per unit to as much as Rs 6.40 per unit; and urea output costs by nearly Rs 9,000 crore per annum.
Reports suggest that Chidambaram and Montek Singh Ahluwalia (special invitee) favoured US$11 mmBtu. Finally, the CCEA went along with the price favoured by the Rangarajan Committee, which is 24 per cent higher than that recommended by the Petroleum Ministry. Experts say this will inhibit new power producers from setting up gas-fired power stations as even imported coal is cheaper. Local coal will be cheaper still, provided of course that coal mines are allocated properly and mined, not squatted upon.
All said, there is simply no rationale for this decision.
Niticentral.com, July 2, 2013
http://www.niticentral.com/2013/07/02/who-benefits-from-gas-price-hike-98418.html