Energy experts are debating gas pricing in India. The previous National Democratic Alliance-led government dismantled the government‘s control over the pricing of petroleum products in a move aimed at attracting private investment and allowing government-run and private oil companies to recoup their huge under-recoveries.

The government did not follow the same pattern in the gas sector notwithstanding pressure from both state-run and private gas majors. This has led to a serious countrywide debate, but no clear answer on the issue.

The government argues that it is unwilling to use its natural resources as a tool of diplomacy. It hopes a global gas market will develop and be based on its own supply and demand, and gas prices would ultimately be separated from those of oil.

In India, gas finds and their commercial exploitation is less than that of oil and the issue of gas pricing would likely get complicated with increasing discoveries coming up for commercial exploitation.

The government cites political reason behind its refusal to touch the prices of cooking gas as this fuel is used by India‘s poor, who form the country‘s most important voting block.

Successive Indian governments have pursued the administered-price mechanism under which the prices of both cooking and transport gas are fixed and revised by the administration. It suits people because the government due to political considerations cannot increase the price of gas beyond a certain point.

‘The APM regime has created an expectation that somehow gas would be available at a relatively low price for power sector,’ said Ahluwalia, who is also a noted economist and financial expert. ‘This led to a lot of power capacity being set up based on loose assurances of availability of supply which were not legally enforceable.’

Gas-marketing companies are hoping for a market-determined gas-pricing mechanism provided the government keeps future gas discoveries out of the purview of APM. The government‘s decision would be based on domestic and global politics, particularly in Asia and South Asia where it is competing with China for energy.

India has also stayed away from a market-friendly gas-pricing system as China makes aggressive moves toward gas resources in the region. In that case, the government would be forced to have control over the gas market and this has caused a problem for the creation of a freer gas market in South Asia.

A draft of India‘s first energy policy also favored market-determined gas pricing. It said that in a gas-shortage situation, prices of natural gas and its allocation should be independently regulated on a cost-plus basis, including reasonable return.

‘Another option could be to price gas on a net-back basis. Should a scenario wherein gas becomes 10-12 percent of India`s energy mix materialize by 2031-32, some 60 percent of the gas supply will be used for power generation,’ said the draft report that has been cleared by the energy coordination committee of the Prime Minister Manmohan Singh. ‘This would mean that beyond the level of gas consumption in the fertilizer, chemical, automotive and domestic sector, gas must compete with coal as the key alternative for power generation.’

The expert group that prepared the policy draft suggested that in the short-term, natural gas prices should be determined on a cost-plus basis by an independent regulator.

India‘s Planning Commission asked the government to move progressively toward market-determined gas prices as the country is on the verge of making gas finds and attracting investment in the sector.

The panel suggested that the government clearly has doubts about the gas-pricing issue, which India has not yet defined despite adopting a market-determined pricing system for petroleum products. 

‘We should progressively move toward market-determined prices of gas as we have done in the case of petroleum products,’ Montek Singh Ahluwalia, the vice chairman of the Planning Commission, told a seminar on the expansion of the gas market organized by Observer Research Foundation, a non-governmental think tank. ‘This is required as in the next few years we would see a lot of new gas discoveries being made particularly in the private sector.’

The Planning Commission is a body that formulates economic and other policies for the Indian government.

‘I am of the view that market-determined gas pricing would allow us to experiment with a system where a very substantial volume of gas would not be put under the administered-price mechanism,’ Ahluwalia said.

India’s Oil and Natural Gas Corp. (ONGC) and its consortium partners, BG India and Reliance Industries, are selling gas at $5.7 per million British thermal units (mmBtu). ONGC has sold 1.3 million cubic metres per day (mmscmd) to local market like Gujarat State Petroleum, Indian Petrochemicals and Reliance’s Hazira unit.

This is the highest price at which domestic gas is being sold in India. The consortium runs a joint venture that operates the Panna/Mukta and Tapti fields in Gujarat offshore, gas output from which is set to rise to 17 mmscmd by September from current 13 mmscmd. BG India, the local arm of Britain’s BG Group and Reliance Industries own 30 percent each in the joint venture with ONGC holding 40 percent.

Of the 13 mmscmd, Vasudeva said the consortium was selling 6 mmscmd to state-run GAIL (India) Ltd. (GAIL.BO: Quote, Profile , Research) at $4.75 per mmBtu and about 4.8 mmscmd to other customers at $4.08 per mmBtu."All the contracts will be renewed in March 2008 and the joint venture has decided to sell the incremental 4 mmscmd of gas separately," Vasudeva said.

ONGC has signed contracts to sell its share of 1.6 mmscmd, from the incremental output, with Gujarat-based power utility Torrent Power Ltd. at $4.75 per mmBtu and with a state-run utility of desert state of Rajasthan at $4.6 per mmBtu, he said. BG India has signed a contract with Gujarat Gas Co. Ltd. at $5.57 per mmBtu, Vasudeva said.Reliance will sell its share of gas to Indian Petrochemicals Corp. 

A World Bank analysis shows that the proposed pipeline from Iran could bring gas to Mumbai at a cost one- third cheaper than the closest alternative, according to a top bank official. And Bangladesh should sell gas to India for the benefit of the entire region. Such economic home truths could be used to counter political opposition to development projects like that of the US to the Iran gas pipeline, Praful Patel, World Bank vice-president for the South Asia region, said at press briefing.

Similarly, Bangladesh should allow India to use its gas for the benefit of the region as any value addition by Dhaka itself would not be cost effective, he said on the eve of the April 3-4 SAARC Summit in New Delhi, where India will take over the rotating chairmanship.

Citing such examples Patel said there are clear signs that policymakers and the private sector in South Asia are pushing for closer regional integration as an unprecedented growth, averaging close to 6 percent per year since the 1990s, has created a new momentum for it. Regional cooperation, he said ‘can be a very effective tool in increasing trade, relieving energy shortages, improving connectivity, increasing investment, and promoting peace and stability.’

According to a recent World Bank study, South Asia is the least integrated region in the world. Intra-regional trade is less than 2 percent of GDP, compared to more than 20 percent for East Asia. Annual trade between India and Pakistan, the bulk of which is routed through Dubai, is currently estimated at US$1 billion, but could be as great as $9 billion.In addition, cross-border investments, and the flow of ideas, crudely measured by the cross-border movement of people or the number of telephone calls, are all low for South Asia.

Patel said, ‘Starting from such a low base, greater integration among South Asian countries could bring huge benefits to its people. Intra-regional trade in South Asia can increase to $20 billion by 2010 if trade barriers are lifted.Benefits from energy trade can also be huge. Nepal has the potential to produce more than 40,000 megawatts of hydro power, most of which could be exported to India, generating $6-10 billion per year of revenues to Nepal.’The more the public in the region are aware of these forgone benefits, the more likely they are to demand greater openness,’ he said.

Although South Asia has significantly reduced import tariffs, the cost of trading across borders is one of the highest in the world. Crossings between India and Bangladesh are so heavily congested that queues often exceed 1,000 trucks on the Indian side with the result that crossing time can take 99 hours instead of 21 hours without delay. Trade can more than double if appropriate regional agreements on roads, rail, air, and shipping are put in place enabling seamless movement, he said. Shantayanan Devarajan, World Bank chief economist for the South Asia region, said regional cooperation will play a crucial role in meeting the infrastructure needs of the region. ‘Better trade facilitation would reduce substantially the transactions costs of intra-regional trade. But streamlining transport and trade systems is also needed to facilitate interregional trade.

‘Many of the region’s competitors have dramatically reduced customs and port clearance times. South Asia risks being left behind.’ Firm level surveys of the investment climate have identified infrastructure, particularly power, as a major constraint to growth in South Asia. It lags most other regions in terms of trade in electricity and gas. Only India, Bhutan, and Nepal currently trade electricity. Bangladesh is endowed with natural gas reserves, but gas trade is constrained by the region’s inadequate infrastructure and political misconceptions. Pakistan and Afghanistan can play an important role as transit states for the rest of South Asia, as they provide the best route for access to Central Asia’s energy.

‘South Asian countries need to diversify the forms of energy and their sources of supply rather than focusing on the costly goal of full national energy self-sufficiency,’ Devarajan said.Several lagging parts of South Asia are border economies. They suffer from the disabilities typically associated with land-locked countries or geographical isolation.Examples include northeast India, northwest Pakistan, northern Bangladesh, and parts of Nepal and Afghanistan. Typically, these sub-regions have poor connectivity with the markets within the country and with the neighbouring countries.Regional cooperation, especially in transport and trade facilitation, can transform these regions from being land-locked to land-linked,Devarajan said. 

Hence until govt. takes a balanced view on overall scenario on gas demand and availability it will be difficult to arrive at a proper pricing solution. However, in Indian context the question will still be haunting whether gas should be priced as per politics or as per free market norms.