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What lies in gas chamber

Mumbai, Feb. 11: Arvind Kejriwal is looking to open a huge can of worms with his attempt to lob the contentious natural gas pricing issue to the Delhi anti-corruption bureau.

He will need to furnish evidence to buttress the charge of a collective conspiracy to defraud the country.

Kejriwal wants Reliance Industries to sell gas from its KG-D6 deepwater gas field to National Thermal Power Corporation (NTPC) at $2.34 per million British thermal unit (MBTU) because RIL won the bid floated in mid-2003 by quoting that price in the global tender floated by the state-owned power utility.

This calls for a correction: the price of gas at the wellhead was $2.34 per MBTU but it would rise to $2.97 when you factor in all the associated charges relating to delivery of the gas at a convenient point.

In 2003, NTPC wanted to tie up a long-term gas supply deal to expand the capacity of the two power projects in Gujarat at Kawas and Gandhar to a combined 2,600MW.

The power generated from these two utilities was never meant to flow to Delhi — so there’s no real chance that power tariff in the national capital would have gone down if RIL had supplied gas to those power projects at that price.

So, what really is Kejriwal’s beef with the pricing of natural gas?

Haul back for a moment and let’s see what RIL was cribbing about in the NTPC gas supply and purchase agreement (GSPA).

In June 2004, when NTPC wrote to RIL and asked it to formalise the gas supply deal, the Ambani-owned corporation balked. Its biggest problem was with a clause that placed no cap on its liabilities if it defaulted on gas supplies. The agreement did not provide for a force majeure situation.

Oil drilling is risky business. What if the well developed a fault and forced the company to stop production? It could not duck its supply obligation if there was a natural calamity or an unforeseen act of God.

According to some reports, RIL had wanted its liability to be capped at 175 per cent of the delivered price of gas. But NTPC would not relent.

The problem with oil drilling — as with any gas-based power project — is that promoters of these projects need to find lenders who will bankroll the enterprise. Banks will never lend to any businessman if the clauses in a long-term gas supply agreement — the one with NTPC was for 17 years — are loaded against the promoter and renders the entire gas field commercially unviable.

Let us also not forget that the price of $2.34 per MBTU was to have been carved in stone for the entire duration of 17 years with no scope for revision even if crude prices moved upward.

When the NTPC contract was negotiated, the price of Brent crude oil — a well-known benchmark — was around $30 barrel. Today, it’s at $106.55.

What NTPC wanted — and which RIL wanted to wriggle out of — was a situation where it would get gas supply at $2.97 per MBTU till 2021 or thereabouts with no possibility of a spike.

It was precisely this drawback that the empowered group of ministers, headed by Pranab Mukherjee, addressed in September 2007. It opted for a complicated formula based on a wellhead price and two variables: the exchange rate for the dollar and the price of crude.

Reliance had suggested that the crude price should be capped at $65 per barrel and the floor should be fixed at $25 per barrel. If the crude price crossed $65, RIL would not stand to get any benefit from the increase.

The e-GoM accepted the formula, except that it brought down the upper price to $60 per barrel.

Since February 2007, the price of Brent crude has never gone below $60 — which means Reliance hasn’t gained a whit on the price since it started commercial production in April 2009.

Realising the limitations of the formula, the e-GoM had set a five-year fixed term for the application of the formula.

That meant the formula was up for revision by April 2014.

Kejriwal has started to pick holes in the formula suggested by the Rangarajan committee which was appointed to suggest a new formula for pricing the gas.

Rangarajan has suggested a formula that sent oil experts into shock.

Noted commentator Surya P. Sethi likened Rangarajan’s effort at setting the new gas price as an exercise designed to establish “the fair price of carrots based on some imputed prices of bananas, apples and oranges”.

What Rangarajan has done is to first try and fix the average producer net back for Indian imports in the trailing 12 months. What it simplistically suggested was that a price of $3 to $4 should be deducted from the prices that India pays for the import of liquefied natural gas (LNG) to attain what it called Value 1.

By doing this, it suggested that the cost of liquefaction, transportation and “sweetening” natural gas would be about $3 to $4 with no real basis for such a supposition.

It then went on to work out “Weighted Average Price to Producers in the Global Markets” during the trailing 12 months which it called Value 2. It said this could be calculated by drawing the Henry Hub price spot index in the US, the National Balancing Point (NBP) spot index of the UK and the average producer net back for all Japanese LNG imports.

Finally, it said the price of Indian gas would be the average of value 1 and 2.

But the first point to realise is that the Rangarajan committee did not suggest that the price would be $8.33 per barrel. This is a derived price from certain projections that experts have made based on the way crude prices were expected to move.

The Rangarajan committee said its formula could be reviewed after five years “when the possibility of pricing based on gas-on-gas competition may be assessed”.

While you could quibble about the Rangarajan formula, it would be outlandish to suggest that the eminent economist was also part of the conspiracy to defraud the country.

But if petroleum minister Veerappa Moily is indicted, then there’s no reason why Kejriwal didn’t find Rangarajan culpable as well.


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