Emerging monopoly

Print edition : October 19, 2007

THE generous terms of the New Exploration and Licensing Policy (NELP), enunciated in 1997 and implemented in 1999-2000, have been justified on the ground that they will attract foreign and private investment into the risky business of oil and gas exploration. So far, in six rounds of the NELP the government has signed production sharing contracts (PSCs) for 161 blocks (including onshore, offshore and deepwater blocks). However, gas has started flowing from only the blocks that were bid in the first three rounds of the NELP.

A recent study conducted by Prayas Energy Group, the Pune-based non-governmental organisation (NGO) that specialises in energy policy and advocacy, shows that Reliance Industries Ltd. (RIL) occupies pole position in the gas markets.

Since deregulation, and particularly after the NELP, an overwhelming portion of the gas contracts have been won by two companies RIL and the Oil and Natural Gas Corporation (ONGC), the public sector petroleum major. The emerging duopoly won 87 per cent of the acreage and 71 per cent of the blocks on offer in the six rounds of the NELP.

The deepwater blocks, such as those in the Krishna-Godavari basin, are significant because nearly all the gas finds have been from those blocks. The duopolys dominance is even more striking if only deepwater blocks are considered.

The share of acreage won by the two companies in the six NELP rounds is about 96 per cent. In the first three NELP rounds from which all the gas finds so far have come the two companies have won 97 per cent of the acreage.

However, a closer analysis reveals that Reliance is far ahead of ONGC if actual finds relative to the acreage of blocks won is considered. Reliances finds in the first three rounds amount to a whopping 78 per cent of all finds; although ONGC is placed second, its share is merely 17 per cent. The finds to acreage ratio, a measure of a companys effectiveness in the gas-hunting business, shows that ONGCs performance has been the worst among the three operators who won bids for deepwater blocks in the first three NELP rounds.

Assuming that the companies remain as effective as they were in the first three rounds, Prayas estimates that in 10 years time, RIL will be the predominant supplier of gas with more than 60 per cent share. The shares of the national oil companies, which are governed by the administered pricing mechanism (APM), are likely to fall from 75 per cent to 30 per cent in 2011-17.

The approval of RILs pricing mechanism, thus, cannot be viewed apart from the context in which it is clearly emerging as a monopoly in the gas business.

The government is driven by the desire to apply the concept of import parity pricing in the petroleum sector. This is the prime reason for the periodic increase in the price of petroleum products. The government is committed to extend this to gas markets.

It is important to recognise that the concept is a purely notional one, completely divorced from actual costs. It has been justified solely on the grounds of offering an attractive return to foreign companies wanting to look for oil and gas in India. However, the fetish of the concept, otherwise described as neoliberal fundamentalism, threatens to play havoc with any semblance of energy security.

Gas is only one of the competing fuels to run a power plant. Coal is the other major option. If the gap between the two fuels widens, as it will following the approval of the RILs formula, it is likely to have two major consequences.

First, existing plans to establish gas-fuelled power plants will have to be reconsidered in the light of RILs gas shock. Secondly, the higher gap between coal and gas provides an opportunity for coal suppliers to increase prices. Whatever happens, the input costs for power plants are bound to escalate.

The magnitude of demand for any product is governed primarily by purchasing power, the price of the product and the price of alternatives. Media reports often portray the gas sector as one in which shortages are endemic. This need not always be true, especially when prices are set sky-high in an arbitrary and non-transparent manner, as has been the case with RILs pricing method.

This is the reason why demand projections for gas from the various wings of the government such as the Planning Commission and the Petroleum Ministry vary considerably. In 2005-06, when total demand was about 90 mmscmd, the power and fertilizer industries consumed about 55 per cent of the gas. The Planning Commission, which had forecast that all urea-based fertilizer plants would be gas based by 2031-32, would clearly need to review these projections.

By lifting the floor level of gas prices, the government is trying to please private investors. This is not only going to affect end-users and the power and fertilizer industries but will also hamper industrial development and endanger energy security.

V. Sridhar

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