Lot of hot air over gas
7/8/2009  |  The Economic Times

RasGas was hosting a dinner in Doha to celebrate the commissioning of additional LNG capacity. One of the senior Exxon executives walked up to tell me that they shed tears every time a cargo is loaded for India.

I knew why he told me that. The deadlock in the final negotiations was resolved on my proposal to hold the price of $2.53 firm over the first five years. RasGas complied with the contract and shipped the cargos on schedule even when gas price went into double digits.

There was an inspired campaign that $2.53 was too high a price, and a whispered suggestion that India did not need any gas to be imported. The RIL offer of $2.34 to NTPC in global tender was compared to RasGas' $2.53, missing out on the fact that LNG price includes about $1.00 for liquefaction and regasification. But that is a different story.

The present petroleum minister has held the job for three-and-a-half years; he had the cramp on 'sovereign right over mineral resources' only after the Mumbai High Court decided on the RIL-RNRL case. Evidently, he is oblivious of the fact that the prime purpose of his ministership is to protect and exercise those rights!

Going by media reports, the minister's and the ministry's case is that to make any offer of sale, the 'contractor' is required under the production sharing contract (PSC) to obtain prior approval of quantity and price from the ministry of petroleum & natural gas (MoP&NG). Did the ministry 'approve' RIL's bid before it was submitted to NTPC?

The point of dispute in the RIL-NTPC case is whether the global tender was concluded in a contract. Going by the stand now taken by the petroleum minister, RIL's bid was illegal because by all accounts, prior 'approval' of the petroleum ministry had not been taken.

The illegal tender should have been rejected outright; on the other hand, NELP terms & conditions were publicised in full by GoI-MoP&NG, and NTPC should have made such prior 'approval' for domestic NELP gas a pre-qualification criterion. Either way, NTPC is at fault! Absurd?

NELP and award of each PSC under NELP, is approved by the Cabinet; individual ministers cannot make any change in a signed PSC. Even when a minister and a contractor agree on modifications, the Cabinet has to accord formal approval. Such changes will apply uniformly to oil and gas in all the PSCs. Why is it necessary for the petroleum ministry to repeatedly file revised submissions to the courts, or at one stage, even disown its own counsel?

There is deafening silence from one set of the interested parties: the power minister, his ministry and his company, NTPC. GoI-MoP is apparently committed to the three-monkey approach to life and times, and possible loss of 12 mmscmd gas @ $2.34 does not matter; after all, the regulator accepts cost of fuel as a 'pass-through' item! Therefore, GoI-MoP is apparently conceding a walk-over to GoI-MoP&NG.

Another source of deafening silence is the ministry of finance. Petroleum minister is struggling to erase the figure of $2.34 everywhere, with the declared intention to maximise GoI revenue; GoI-MoF is quietly watching the game.

Given the petroleum minister's obsession for money, why is his ministry putting his company, ONGC, on the mat for securing a price of $5.50 on 'new' gas? The record shows the minister's utter indifference to the compulsion on his company, ONGC, to sell almost all the gas at APM price of less than $2.00; his other company, OIL (where an IPO is due to be launched) gets only a fraction of this APM price in the North-East. GoI-MoP&NG used to allocate specific quantities of all domestic gas to consumers. This "Gas Linkage Committee" was wound up in 2003 as a measure of market reform. We now have an interesting contradiction where according to the petroleum ministry, producers of APM gas are free to negotiate quantities with consumers but producers of NELP gas are not!

To generate investor interest, the government had offered several concessions and guarantees in NELP and these were publicised in every round, all over the world (at arguably avoidable cost to the taxpayer). Be that as it may, the freedom to set prices in sync with the global market is one of the most important features of NELP; NELP even allows export (of course with prior approval of GoI-MoP&NG) if international prices are not available in the domestic market.

The prime condition is that the price should be firmed up on an 'arms-length' basis. One of the holiest principles of the government is that there is no better way than global tenders to establish such a price, and NTPC did just that.

Gas market has unique features. One example: production of 'free' gas can be calibrated to actual demand (is the minister aware of ONGC capping its wells in Tripura for decades for lack of demand?) unlike 'associated' gas which is produced with oil, as in Mumbai High.

Another example: all pipelines, especially gas pipelines are natural monopolies, and tenders can be invited only from buyers who happen to be connected to a particular pipeline grid used by the seller; by definition, these are cases of 'limited tender'.

The buyers have no choice but to accept whatever pricing formula is imposed by the lone seller who may or may not be the transporter as well. Such cases are to be classified as 'single tender' transactions, abhorred by the GoI.

It will be instructive to know how the EGOM treated this issue. (As a buyer, NTPC had side-stepped this problem by asking for a 'delivered' price, making the seller responsible for transportation). One more example: the conflict of interest where the seller is also the transporter for several buyers, and the application of 'common carrier' principle to pre-empt abuse.

Epilogue: Doha again, this time for a conference hosted by the government. Some weeks earlier, Petronas had walked out of a gas deal that they had pursued for years in Iran. In fact, Petronas had bid for the NTPC contract on the expectation of sourcing from Iran. During a coffee-break, a top executive of Petronas and I exchanged notes on our experiences in Iran. As we walked back to the conference hall, he said: we were lucky to have lost the NTPC deal.

The author is former Chairman, ONGC Group of Companies
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