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Cover Story | July 2014

India should scrap benchmark pricing

The overall investment environment in NELP got affected due to uncertainties in the contract administration, says Debasish Mishra, Senior Director, Deloitte India (Energy Practices).

Should India scrap benchmark prices?
Every gas field has different geology and several other factors affecting cost of production. Many of the deep dry offshore wells in India are not viable at the current gas price. Unlike the process industry where benchmarking of cost of production is possible, in oil & gas exploration and production there is no benchmark possible because of differing factors. So the output pricing determines whether a production facility is viable or not. Overall investment environment in New Exploration Licensing Policy (NELP) got affected due to uncertainties in the government's action in contract administration, monitoring, review of investments and pricing decisions.

If the Government makes prices governed by market conditions, it would provide the best signal for viable investment decisions.

What about a move from production-sharing to revenue sharing?
The government has also been considering moving to a revenue-sharing model from the current production-sharing scheme. At present, companies can recover costs of exploration and production before sharing profit with the government. The Comptroller and Auditor General (CAG) had criticised this system on the grounds that it encouraged companies to increase capital expenditure and delayed the government's share of profit petroleum. If India moves to a revenue-sharing model, there may be difficulty in attracting risk capital.

Who will benefit from a hike?
Domestic gas production has gone down below 100 mmscmd. We are probably importing around 50 mmscmd of R-LNG. If prices are increased companies will benefit in proportion to their share in domestic production.

Is it better to increase prices and encourage domestic production?
It is quite obvious that at higher prices, more oil & gas fields become viable. Bringing back my earlier argument, the Government, over the long run, should make gas prices determined by the market.

In the interim, to encourage more production from existing licenses, they should implement the Rangarajan Committee recommendations.

Will this have implication for the power sector?
For the existing contracts, any increase in gas prices would certainly increase the price of electricity. But today we have hardly 4.6 per cent of energy supplied from gas-based projects. So their weighted average impact on the overall power sector would be probably around 12 paise to a unit.

As such our condition is where gas is not available for the power sector and many gas based power plants are stranded. It is better to use gas power plant for peaking power requirement, rather than as base load.

The Central Government, which will get increased revenue from taxes and dividends from the gas producing companies, can consider giving a package to the discoms affected by this increase.

What will be the impact of a gas price hike on city gas distribution networks?
Prices for PNG will go up unless subsidised by the Central Government. But we must realise that unlike LPG, PNG is used by the more well-to-do section of society and their number is really small.

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