The Kelkar Committee has produced a road map for a market-determined price for natural gas. Inter-generational equity, it says, requires non-renewable resources like gas to be sold to the highest bidder. A lower price deprives future generations of their full entitlement to national resources. This novel argument strengthens the simple logic of auctioning resources to promote efficiency and governance. Selling below auction price is favouritism. The CAG estimated huge losses implicit in the failure to auction spectrum and coal blocks. Similar huge losses flow from failure to auction gas, eroding royalties, taxes and the government’s gas share.
India imports 30% of its gas needs, and this may soon become 70%. Kelkar emphasizes a top price for efficient use and to incentivize all-out exploration. The government must honour exploration contracts saying that any gas found can be sold at the market price. Only then will India get more bids, at higher rates, for new fields. Many critics who want auctions for spectrum and coal oppose auctions for gas. What hypocrisy! This often reflects a desire to hit the Ambanis. Now, the Ambanis and crooked politicians may have committed a thousand sins. But good governance means finding hard evidence and prosecuting Mukesh Ambani. It does not mean violating his contracts. Contract violation makes India’s name mud in the global oil business. That’s why few bids have come in recent exploration rounds under NELP (New Exploration Licensing Policy), whereas over a hundred companies bid at earlier auctions.
All contracts say the government should certify that gas sales were at an “arm’s length” price (a competitive price, not a concessional one for friends). This clause has been twisted into an excuse for price control. The history of this is very smelly.
When the NTPC sought global bids for gas for new plants in Gujarat, Reliance won with a bid of $ 2.38/unit. That was a market-driven price, and should have been the model for the future. But Reliance had blundered. Exploration costs quadrupled by 2008. Anil Ambani claimed Mukesh inflated drilling costs, something being investigated. Rising costs meant Reliance would lose heavily in supplying the NTPC at $2.34/unit. Then, Mukesh and Anil quarrelled and split. Anil said the partition agreement entitled his plants to get gas at the cheap NTPC price. Mukesh was in deep trouble. Then petroleum minister Murali Deora intervened. The NTPC price had not yet been ratified as an arm’s length price by the government, an oversight that became an excuse to upend the whole auction. A cabinet committee was set up to decide the “market price”. Only in India is a “market price” decided by the cabinet or official committees, not the marketplace! The government fixed the price at $4.20/unit for five years. In no true market are prices fixed for five years — they fluctuate every minute.
This price fix benefited Mukesh, at the expense of Anil and the NTPC. But the benefit was temporary. Soon after, the global price of gas skyrocketed, up to $15/unit in Asia. The Rangarajan Committee in 2012 suggested a new price formula based on prices in various international hubs. This came to around $8/unit. But India is currently importing gas at up to $14/unit. Scarce goods are priced on par with imports in a free market. Yet critics have denounced $8/unit as a scam benefiting Mukesh, besmirching honourable experts like Rangarajan and Kelkar.
Mukesh produces just 10% of India’s gas today — most comes from the public sector. The ONGC has long demanded at least $7/unit to make its offshore fields viable. But the critics are obsessed with somehow nailing Mukesh. For this they will happily destroy contracts, ruin India’s reputation globally, reduce the number and price of bids for future exploration contracts, leave India short of gas, jeopardize the trade gap, make fresh exploration and production uneconomic, and deprive the government and its oil companies of massive revenues.
Some analysts say gas prices vary hugely from the US to Japan, so there’s no such thing as a market price in India. Really? The price of cement, sand and other items varies hugely from country to country, but does that mean markets for these don’t exist in India? Willing buyers and sellers set prices in each market, and these vary across regions. Newspaper prices vary as much as gas prices from country to country, but that’s no reason for government committees to set the market price of Indian newspapers. The Kelkar Committee sends a clear message — for morality, efficiency and good governance, sell to the highest bidder. The government will reap enormous profits, and can subsidise any sector it deems deserving.