The people of India solemnly resolved to constitute India into a Sovereign Socialist Democratic Republic. “What a fall there has been from that ideal, my countrymen!,”one would say. After 65 years, the country is anything other than a Sovereign Democratic Republic. What it has become has been variously described: a dynastic republic (whatever it may mean), an oligarchy, a plutocracy, a corporatocracy, a mafiocracy (as a social activist retorted, when the government spokesperson(s) called the people who were protesting against the government’s “policies” (including corruption, sell-out-to F.D. Investors, etc.) mobocracy, and so on.
The appellation, that appeals equally or even more, is that this country has been converted by the ruling elite into a VAMPIRE STATE a country out of which a dictator or ruling elite sucks money and resources. We have seen this happening on a monumental scale in the allocation of the electromagnetic spectrum (the 2G scam) and the allocation of Coal Blocks. The latter will typically illustrate how the government is going about, in utter disregard of the Provisions of the Directive Principles of State Policy and the provisions of Article 39 of the Constitution of India which lay down, inter alia, that the ownership and the control of the material and resources of the community are so distributed as best to serve the Common Good. The Supreme Court pulled up the Coal Ministry for not supplying required material to the CBI for conducting the probe into Coal Block allocations. The Bench told the Attorney General (AG) that just a reading of the first three paragraphs of the Status Report showed that the CBI was struggling with the probe in the absence of documents on the decisions taken by the screening committee on Coal Block allocations: there is nothing given to the CBI; there is a lot of deficiency/infirmity in the decisions taken by the Committee. Regarding everything, there is nothing on record. The Union of India does not have basic documents. Limitation of space does not permit other aspects of the sordid state of affairs to be spelt out!
In the above background, one will not be surprised at the gyrations, U-turns and somersaults of the Government Ministries before arriving at what looks like a pre-determined hike for the gas price. I draw the attention of the concerned citizens to the sequence of events.
As the “Rangarajan Committee formula” has become the keystone of the edifice for domestic gas pricing, I crave the permission of the concerned citizens to dwell a little elaborately on the topic. In his article titled, “Making a mockery of domestic gas pricing” in The Hindu dated 18.1.2013, Sri Surya P. Sethi, formerly Principal Advisor, Power and Energy, Government of India, prefaced the article, saying that Dr. Rangarajan was his professor and he worshipped him as an economist and academician. But, he could not understand why Dr. Rangarajan staked his enormous reputation on reports on the energy sector, which were far removed from his area of experience and expertise, especially when the Committee he chaired did not have a single member with any notable knowledge or understanding of the complex global market. The report of the Committee confirms that most Indian natural gas producers are getting a guaranteed well head price of $4.2 to $5.25 per MMBTU (Million Metric British Thermal Units). But, the Report does not clarify whether this price is for dry or wet gas, thereby ignoring the economic values of natural gas liquids extracted by the producers before they sell the dry gas as feedstock and/or energy source. The report suggests that the above price is not remunerative enough to encourage domestic natural gas producers; but the report does not produce any evidence to justify such a conclusion. There is no independent conventional gas field of significance in the world, which has received such a high well head price for dry natural gas year after year.
Sethi says that the committee has justified the formula approved for pricing natural gas from the KG (Krishna-Godavari) Basin’s D-6 field, overlooking the objections that he and the then Cabinet Secretary had raised against the proposed formula. The Committee failed to point out that India was the only country in the world which adopted the formula by which the gas price would rise exponentially with the price of crude, between its floor price and the cap on the price, while the rest of the world follows a formulae by which such linkage is a linear function, which ensures a more gradual slope or rate of increase between the floor price of the gas and the cap or upper limit on it. To illustrate, under the approved formula, the floor price of the K-G Basin gas determined a crude price of $25 a barrel is $2.50 per unit (i.e, MMBTU), but the price rises exponentially (i.e., steeply) to $3.50 per unit at a crude price of $26/barrel, yielding a 40% increase in the gas price for a 4% increase in the price of crude. In essence, the “approved formula” violates international practice; it ensures that, under prevailing market conditions, the producer of K-G Basin gas receives a price that is well beyond the price at which the same gas would fetch under, for example, an international tender. Sethi observes that despite the CAG’s report, the full extent of the K-G Basin Scam is far from being exposed in toto. It is surprising that the Rangarajan Committee finds that the K-G Basin gas price which also led to an increase in the gas prices approved for ONGC, is not sufficiently remunerative!
A further and more serious infirmity lies in the recommended formula, for determining the well head price of conventional natural gas produced in India, by averaging some numbers derived from foreign gas markets, but, these numbers do not represent the well head price of conventional natural gas anywhere in the world nor do they reflect the cost of service for producing conventional natural gas in India. In short, the suggested formula is like establishing the fair price of carrots based on some imputed prices of bananas, apples and oranges!
A little more foray into the fuzzy domain of the Rangarajan Committee’s recommendation is unavoidable though it will exasperating for the reader, no doubt.
The Committee recommends estimating on a monthly basis, what it calls the “Average Producer Over Back for Indian Imports’ for the ‘trailing’(!) 12 months, by deducting $3 to $4 from the prices paid by India for import of LNG from different sources over the same period. All LNG imports, including spot purchases from contracts should be included. The $3 – $4 number, representing the current cost estimates of liquefaction, transportation and sweetening of natural gas should be updated regularly. This would yield a number. Sethi comments that such a number will, however, not be the average well-head price of conventional natural gas in the countries which export LNG to India; nor will it be relevant to determining a fair well head price for Indian producers of conventional natural gas.
Next, the Committee recommends that we should estimate, on a monthly basis, something which it calls for “Weighted Average Price to producers in the Global Markets” during the preceding 12 months. For this, the Committee uses the “Henry Hob spot index “as the price for all U.S. gas sales, the NBP spot index of the U.K. for sales to countries comprising Europe and the former Soviet Union, and the “Average Producer Net Back” for Japanese LNG imports over the same period. The Committee recommends that the total volume of all gas contracts in the respective jurisdiction be included in toto. This exercise (in reality, this rigmarole!) will yield a number. But its relevance to Indian gas producers defines comprehension, Sethi points out.
The Committee recommends that the average of the numbers (or results!) calculated as above, based on hitherto unknown concepts in the global markets, be used to “compensate” producers of conventional natural gas in India!
If there are any concerned citizens who do not think that the above is practically the last word for fuzziness and opacity, they certainly possess the highest I.Q. imaginable!!
Sethi says that, given the market realities and the current state of the gas industry in India, a well-regulated cost of service should be the preferred and sensible option for determining the well head price of Indian gas. He observes, in anguish, that as long as the PMO keeps appointing acceptable babus and academics to such important Committees and specialized position of governance and regulation, it will be the blind leading the blind, and we will stumble from one blunder to another under historical myths that pervade India’s energy and other key sectors.
Before moving on to watching the vicissitudes through which the weighty report of the committee passed, it will be relevant to note that, while the UPA government had been proactive in responding to demands by the Reliance Industries Limited (RIL) for a raise in the prices of natural gas, the government had shown hardly any urgency in implementing the C & AG’s recommendations made in the year 2009 on the audit of oil and gas contractors such as RIL. While Petroleum Ministry and the Prime Minister’s office were fast tracking the revision of prices, even though the deadline for the revision was a year away (in April, 2014), the Ministry showed little enthusiasm and movement to incorporate in the contracts from New Exploration Licensing Policy (NELP-VIII) the amendments suggested by the CAG, so as to make audits by the CAG mandatory and avoid ambiguity and disputes which may crop up. The CAG wrote that this enabling audit was necessary, in view of the huge government stake particularly in terms of current and future profits. CAG had also pointed out that the Regulatory Office (Directorate General of Hydrocarbons) should be funded from the Petroleum Ministry’s budget; but the DGH’s expenses were being met from grants sanctioned by the Oil Industry Development Board (OIDB). As there was no parliamentary control over the OIDB funds, the arrangement did not promote accountability, but limited the scope of audit significantly. The Government, of course, did not bother, as its interest lay with the oil contractors, and the people’s interest, as always, took the back seat.
Now, coming to the “Rangarajan Committee bench mark,” (referred to hereafter as the R. Committee) the Finance Ministry (which, as concerned citizens may kindly recall, was totally supine; facilitating the Commonwealth Games scam, the 2G scam, the Coal allocation scam, etc.) suddenly became proactive(!), rejected the pricing formula suggested by the Committee and instead suggested an alternative formula in a note for the consideration of the Empowered Group of Ministers (EGZeroM!), while deciding the “road map” for gas pricing. The “Fin Min” (Finance Ministry)’s suggestion was to adopt the well head prices charged by suppliers in the region (Oman, Qatar, Abu Dhabi and Malaysia) for long-term contracts, on the grounds that these prices may be lower than the R. Committee figure. The Ministries of Power and Fertilizers supported the rejection of the R. Committee, which linked domestic natural gas prices within the international prices, a demand made by the RIL and supported by the Planning Commission. The note from the Power Ministry further stated that the new price became unviable to power and fertilizer sectors, the demand for gas may slump drastically as happened in the U.S. in 2005, and this would be against the interests of producers and consumers alike, apart from its not being in the national interest.
In the context of the R. Committee placing so much reliance in the international prices, and “our” (FDI-driven) government swearing by those prices, I wish to draw the attention of the concerned citizens to a report from Lindman/Uslo (in The Hindu dated Thursday, May 16, 2013) that European authorities have raided the offices of Oil Majors Shell, BP and Statoil, in an investigation of suspected manipulation of oil prices, one of the biggest cross-border actions since the Libor swigging scandal (detailed in an earlier article of mine, I humbly remind the concerned citizens)! On Tuesday the European Commission said it was investigating major oil companies over suspected anti-competitive agreements related to submission of prices to leading oil pricing agency Platts (a unit of McGraw Hill Group). Officials carried out unannounced inspections of the premises of several companies active in and providing services to the crude oil, refined oil products and biofuel sectors. The inspection took place in two European Union Member State and one non-EU country. The Commission had concerns that the companies might have colluded in reporting distorted prices to a Price Reporting Agency to manipulate the published prices for a number of oil and bio fuel production. The companies might also have prevented others from participating in the price assessment process, with a view to distorting published prices. The suspected violations were related to the Platts price assessment process and might have been going on since 2002. The Commissions said that even small distortions of assessed prices might have a huge impact on the prices of oil, refined oil products and bio-fuels purchases. Platts, Royal Dutch, Shell, BP and Statoil were cooperating with the probe.
Let us traverse the labyrinth leading to the “policy decision” on the gas price hike. According to a report, the FinMin rejected the formula suggested by the R. Committee on gas pricing, and asked the Petroleum and Natural Gas Ministry to place before the EGOM an alternative formula based on well-head prices of supplies in the region (including Gulf countries) for long term contracts. On the R. Committee formula, “there does not appear to be any justification for the said determination of prices, particularly in the context of the specific provision in the production sharing contract, which has led to the need for a price determination by the EGOM; that is no logic in the inclusion by the R. Committee of the consumption by Japan, which actually has very high import prices and, after the Fukushima disaster, artificially inflated the price. The total consumption of Europe artificially distorts the high NBP price also. Taking the high price of gas in far off regions such as Europe and Japan would only be detrimental to the Government of India. Nowhere in the world, have the well head prices of natural gas been linked to spot LNG contract prices, which are highly volatile and tend to be on the higher side,” pontificated the Finance Ministry. I have quoted this in detail so that the contrast in the complete U-turn made by the Finance Ministry subsequently may not be lost sight of.
The decision ultimately taken is best described in the article by Paranjoy Guha Thakurta, entitled “The good of a few.” Says he : “The decision by the Union Cabinet on June 27, 2013, was to increase the price of natural gas, with the Government claiming – as usual – that it is acting on the interests of the nation(!), though the decision will only spur inflation and help corporates, not consumers. That the Government would place corporate interests over consumer interests was not surprising, for that is the way this Government has been functioning for quite some time now. What was amazing was the brazen manner in which the interests of two of the largest companies in India – the ONGC and the Reliance Industries Limited – were sought to be equated with “national interests,” despite allegations of crony capitalism which have been leveled by me again and again against the government.” Thakurta says that the Finance Minister had stated that higher subsidy might be given to gas-based electricity and fertilizers. This is curious for an individual who has so far been steadfastly arguing against higher subsidies. Apparently, what is sauce for the goose is, in this case, no sauce for the gander. The ground was prepared for this choreographed exercise when a Committee led by Dr. C. Rangarajan presented a report that was highly contentious. The Committee did not deliberately seek the advice of international energy experts, and used questionable benchmarks including the price of liquefied natural gas in Japan, which is one of the most expensive in the world, to argue for a higher administered price of domestically produced natural gas. More scandalous in this episode is that ministers in the (Union) government have exercised their political prerogative not in the interest of the country, in the interest of the people of India, to ride roughshod over the recommendations of their own bureaucrats.
The June 27 meeting of the CCEA (Cabinet Committee on Economic Affairs) was apparently a heated one. The Finance Minister, the Deputy Chairman of the Planning Commission (special invitee to the meeting) and the Minister for Petroleum and Natural Gas were reportedly in favour of an increase in the price of gas from $4.20 per MMBTU on the ground that the higher price would “incentivize” exploration efforts which, in turn, would result in gas output going up. It appears that, at one stage, some of the ministers pitched for a $11 per standard unit price of gas against the $8.40 per unit that was eventually agreed upon. The argument of a group of ministers that a higher administered price of gas would not automatically lead to expeditious new discoveries of gas and higher output something which would be obvious to every honest citizen was given a short shrift.
A number of other valid questions which were raised were: Why had RIL not been penalized for not drilling the number of wells it was supposed to? Why was the company being treated with kid gloves when its actual production from the D-6 (Dhirubhai – 6) block in the Krishna-Godavari offshore basin was less than one fourth of what had been originally expected?
As expected, says Thakurta, the group advocating a steep hike won hands down while the Prime Minister is said to have maintained a strong silence through the proceedings of the CCEA. Thakurta poses the question: “Should not Ministers like Mr. Moily be asked to explain why they over-ruled their own bureaucrats while making particular decisions? Should not the Right to Information Act be made applicable to cabinet proceedings?
Thakurta draws attention to what Mr. Gurudas Dasgupta had reiterated when he crossed swords with Moily in the run-up to the government’s decision to hike gas prices, namely, that this was a gigantic scam.
Within days of approving at a “new look” gas pricing policy, the UPA II has “virtually withdrawn” the officially declared $8.4 MMBTU price, making it clear that it will be the Rangarajan formula (which seems to have nine lives like the proverbial cat!) and the “market forces” which will decide the price in future. The “underlying principle” seems to be that the Indian producer should get a similar price to what the gas producers elsewhere are getting. (The logic for this is not clear). The new stance of the Government is a fall out of the strong opposition from various quarters, who have slammed the government on almost doubling of the price hike. The Government is trying to wriggle out of the situation by maintaining that it was not sticking to any fixed price from next year onwards, and would rather let events unfold in the run up to the April 2014 deadline to decide on the new gas price.
It should be clear that the Government is perpetrating a monstrous fraud on the people with some fictitious “market prices” for gas and oil, and fleecing the people with high administered prices, besides paying lakhs of crores to the oil companies as subsidy. The subsidy burden to meet “core sector demand” through LNG can go up to as high as 1.20 lakh crore – if the demand is not substantially met by domestic gas.
Readers may demand to know whether the writer has any suggestion to offer to tackle this menace? One humble suggestion is that there should be a mass movement against such unscrupulous exploitation by the Oil and Gas Companies, acting in tandem with government. A people’s samiti should be formed for protection of the country and the people from the machinations of the Vampire State (which our country has become), with a sizeable corpus – from donations collected from the people — to fund the cost for a deep study of such issues and do wide propaganda on how the government is facilitating the loot of the country’s natural resources by big business interests. To start with, perhaps, the study should take up the oil and gas price and determine, with the help of accounting and costing experts, the actual cost of indigenous production of oil and gas, as well as that of imported oil, LPG, LNG, etc., and confront them with the manipulated prices touted by Government. One should not be surprised if the padding in the price is to the extent of 40% (as a guesstimate); but that is for the organization suggested above to discover and save the country from being bled white.
By C. A. Balasubramanian, Additional Controller General of Accounts, Government of India (retd.)