Is Gas Pricing The Latest Casualty Of The Govt.’s Policy Reversals?

Making a policy decision on one day, and backtracking on it the very next day has become something of a ritual with the current government now. Over the past 4 years, the UPA II has been consistently undoing its decisions, for example GAAR, DTC, GST, FDI in retail, etc.

The latest in this sorry list seems to be the much-hyped decision of the CCEA announced on June 27 to raise the prices of natural gas to USD8.4/mmbtu. With the Ministry of Finance sending a controversial note to the Petroleum Ministry regarding the capping of gas prices and taking steps to ensure that RIL delivers on the shortfall it owes over the old price of USD 4.2, it seems like another policy reversal is on the cards.

The Petroleum Minister reiterated on Thursday, July 11, that there is no question of reviewing the CCEA decision. However, more than clearing the air, this added to the confusion as the minister clarified that the revised price would be USD 6.8/mmbtu and not 8.4/mmbtu as was announced earlier.

The CCEA had accepted the pricing formula suggested by the Dr Rangarajan Committee, and as per the calculations, the current price was USD 6.8. But there was a catch – the formula also factored in the spot price of gas. As the price is scheduled to be revised from April 2014, the exact price of spot gas cannot be calculated upfront. Whatever the reason for the confusion among ministries, it will certainly fuel the problems related to policy decision and execution, damage the overall business morale and dampen investor confidence.

According to a Reuters report, the Finance Ministry has clearly pointed out in its note that, “RIL must be made to sell the quantity it has failed to deliver as per its own targets during past 3 years at current price of USD 4.2.” This news received all around flak from the business and analyst fraternity, as everybody fumed over why these topics weren’t discussed before the decision was made by the CCEA. Also worthy of consideration is that if the Petroleum and Finance ministers were present at the CCEA meeting, why are these doubts being raised over the decision, that too after 2 weeks. In fact, before the CCEA decision, the Petroleum ministry had itself proposed a price of USD 6.8/mmbtu in place of the Dr. Rangarajan Committee formula as the latter had faced a lot of criticism from the Ministry of Power, Ministry of Fertilisers, etc. apart from opposition parties.

On the other hand, if RIL would be asked to make good the previous shortfall at the old price (as quoted in the note), it would be a huge setback for the company. As per the estimate in the last four years, the total gas production target for RIL from KG-D6 block was around 305 mmscmd till FY14, but the actual production has been just around 140 mmscmd. In such a case, the company would have to give away 165 mmscmd gas at the old price.