Curbing monopoly nature of gas supply
The better part of valour is discretion, penned the Bard for a stage setting. The backdrop may well have been the vexed issue of pricing of natural gas lately discovered in the Krishna-Godavari basin.
By Jaideep Mishra, TNN |
NEW DELHI: The better part of valour is discretion, penned the Bard for a stage setting. The backdrop may well have been the vexed issue of pricing of natural gas lately discovered in the Krishna-Godavari basin.
Already, there is much policy action and multiple reports on the mechanics of gas pricing, and there’s more in the pipeline with an E-GoM mulling over the issue. Proper market design for gas needs to factor in the singular economics of gas markets. What is required is transparency and clarity in the process of price discovery.
Now, gas pricing is in currency because supplies from the KG basin, under the new exploration licensing policy, are to be at “arm’s-length prices”, as per article 21 of the production sharing contract. This is a paradigm shift, in terms of range and scope. Much of the limited gas supplies, mostly from the long-producing Bombay High field, are at administered prices. In recent years, there have been a few other gas finds. But the consequent rates can hardly be considered benchmark prices, given that the gas sales have been short-term contracts and for relatively small volumes. Hence the pressing need for price discovery of the KG gas struck by RIL.
Reportedly, RIL did invite price bids from select gas users like power and fertiliser producers to arrive at a “market-determined price” for the gas. But the price and the very process of its determination has since been contested by two key parties, RNRL and NTPC, for breach of contract. Prior to the demerger and split in the Reliance group, RIL had entered into a contract with RNRL to supply 28 mmscmd of gas. Later, RIL bid and won the contract to supply 12 mmscmd of gas to NTPC at a price close to that originally agreed upon for RNRL.
The point of dispute is that RIL’s recently discovered gas price is a substantial upward revision of the previous, contracted price. It is true that last November, a government panel did reject the initial price contract between RIL and RNRL, taking the view that it could not have been at arm’s-length prices. But where such price discovery is not quite possible, the committee did add, “the most recent competitively-determined price in the region” ought to be the indicative price. And the contract with NTPC does appear to be such a price.
It may be argued that the gas agreement was a while ago, and that the price needs to be indexed to factor in higher costs. However, there are issues here that need to be resolved. Reportedly, RIL has heavily indexed its gas price to sweet, pricey Brent crude which seems questionable. The normal practice hitherto has been to index gas prices to a certain percentage increase in furnace oil prices, as the rates have shown the least price volatility in recent years. The other issue is capital expenditure in gas production. The fact of the matter is that the significant cost escalation that RIL has met with needs to be independently vetted. Rapidly rising production costs would considerably bring down the profit petroleum share for the government. Hence, the need for proper regulatory oversight, which seems markedly absent at present.
Meanwhile, the committee of secretaries (CoS) that looked into the methodology of RIL gas pricing has reportedly put on record that there are “several infirmities” in the procedure followed, and apparently that undue advantage was taken of the “stranded assets” of the gas users. CoS has since called for a gas utilisation and gas pricing policy, which the production sharing contract explicitly provides for. Of late, the Economic Advisory Council (EAC) has reportedly maintained that while RIL may have applied uniform criteria while inviting user parties to bid, “since this was not published widely prior to bidding and volume of gas on offer was not indicated upfront, there does appear to be some avoidable lack of transparency...” EAC has since reportedly called for fresh bids in a transparent and well publicised manner.
The council has suggested that the volume of gas offered be indicated in advance and that supply be assured for at least a decade to have competitive arm’s-length price. Now, administered prices, which remain unrevised for years on end, are clearly sub-optimal. We need competitive prices in gas to properly determine scarcity value, to get relative prices right and to better allocate scarce resources. There is a huge shortage in gas, and the right pricing is the key to coagulating funds for gas prospecting, discovery and production.
But while we develop a proper gas market, there is no reason not to have sound regulatory oversight given the logistics and monopoly characteristics of gas supply. Regulatory responsibility needs to be clearly defined and vested with an appropriate regulative body which has enough legislative sanction to vet costs, prices and keep tab on market practices. Given that the transportation of gas is more often than not a natural monopoly — it is generally the case that it is inefficient to build competing networks — the supply to end users would almost invariably involve an element of monopoly. Hence the case for regulatory oversight.
Non-gas costs are usually higher than gas costs in gas pricing. The effective separation of management and accounting of the pipeline and storage functions need to be “unbundled” from the supply and trading activities of gas players, for non-discriminatory access and efficient prices. There is the need to move towards spot and futures gas price indexation in mid-term and long-term supply contracts.
Already, there is much policy action and multiple reports on the mechanics of gas pricing, and there’s more in the pipeline with an E-GoM mulling over the issue. Proper market design for gas needs to factor in the singular economics of gas markets. What is required is transparency and clarity in the process of price discovery.
Now, gas pricing is in currency because supplies from the KG basin, under the new exploration licensing policy, are to be at “arm’s-length prices”, as per article 21 of the production sharing contract. This is a paradigm shift, in terms of range and scope. Much of the limited gas supplies, mostly from the long-producing Bombay High field, are at administered prices. In recent years, there have been a few other gas finds. But the consequent rates can hardly be considered benchmark prices, given that the gas sales have been short-term contracts and for relatively small volumes. Hence the pressing need for price discovery of the KG gas struck by RIL.
Reportedly, RIL did invite price bids from select gas users like power and fertiliser producers to arrive at a “market-determined price” for the gas. But the price and the very process of its determination has since been contested by two key parties, RNRL and NTPC, for breach of contract. Prior to the demerger and split in the Reliance group, RIL had entered into a contract with RNRL to supply 28 mmscmd of gas. Later, RIL bid and won the contract to supply 12 mmscmd of gas to NTPC at a price close to that originally agreed upon for RNRL.
The point of dispute is that RIL’s recently discovered gas price is a substantial upward revision of the previous, contracted price. It is true that last November, a government panel did reject the initial price contract between RIL and RNRL, taking the view that it could not have been at arm’s-length prices. But where such price discovery is not quite possible, the committee did add, “the most recent competitively-determined price in the region” ought to be the indicative price. And the contract with NTPC does appear to be such a price.
It may be argued that the gas agreement was a while ago, and that the price needs to be indexed to factor in higher costs. However, there are issues here that need to be resolved. Reportedly, RIL has heavily indexed its gas price to sweet, pricey Brent crude which seems questionable. The normal practice hitherto has been to index gas prices to a certain percentage increase in furnace oil prices, as the rates have shown the least price volatility in recent years. The other issue is capital expenditure in gas production. The fact of the matter is that the significant cost escalation that RIL has met with needs to be independently vetted. Rapidly rising production costs would considerably bring down the profit petroleum share for the government. Hence, the need for proper regulatory oversight, which seems markedly absent at present.
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Meanwhile, the committee of secretaries (CoS) that looked into the methodology of RIL gas pricing has reportedly put on record that there are “several infirmities” in the procedure followed, and apparently that undue advantage was taken of the “stranded assets” of the gas users. CoS has since called for a gas utilisation and gas pricing policy, which the production sharing contract explicitly provides for. Of late, the Economic Advisory Council (EAC) has reportedly maintained that while RIL may have applied uniform criteria while inviting user parties to bid, “since this was not published widely prior to bidding and volume of gas on offer was not indicated upfront, there does appear to be some avoidable lack of transparency...” EAC has since reportedly called for fresh bids in a transparent and well publicised manner.
The council has suggested that the volume of gas offered be indicated in advance and that supply be assured for at least a decade to have competitive arm’s-length price. Now, administered prices, which remain unrevised for years on end, are clearly sub-optimal. We need competitive prices in gas to properly determine scarcity value, to get relative prices right and to better allocate scarce resources. There is a huge shortage in gas, and the right pricing is the key to coagulating funds for gas prospecting, discovery and production.
But while we develop a proper gas market, there is no reason not to have sound regulatory oversight given the logistics and monopoly characteristics of gas supply. Regulatory responsibility needs to be clearly defined and vested with an appropriate regulative body which has enough legislative sanction to vet costs, prices and keep tab on market practices. Given that the transportation of gas is more often than not a natural monopoly — it is generally the case that it is inefficient to build competing networks — the supply to end users would almost invariably involve an element of monopoly. Hence the case for regulatory oversight.
Non-gas costs are usually higher than gas costs in gas pricing. The effective separation of management and accounting of the pipeline and storage functions need to be “unbundled” from the supply and trading activities of gas players, for non-discriminatory access and efficient prices. There is the need to move towards spot and futures gas price indexation in mid-term and long-term supply contracts.
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