The Dilemma of KG Gas: Decoded

Nowadays, This Title became the synonyms of the Crony Capitalism. There are many reports, articles published on the topic in both electronic and Print media. But there are many doubts in mind related to pricing, supply and demand etc. Gas business is the complex issue. Here is the small try to make it simple.

Before starting the Topic, need to understand the basic terms/abbreviation  related to the issue : RIL – Company head by Mukesh A , RNRL – Company head by Anil A , ONGC , NTPC, GAIL – Govt PSUs , DGH(Regulator) – Director General of hydrocarbon , MoPENG –Ministry of Petroleum and Natural Gas ,  PSC- Profit sharing Agreement , MMSCFD (Million standard cubic feet per day) – Unit to measure gas production.

There are mainly three issue related to This topic – (1) Gas pricing (2) Gold plating (3) Hoarding of gas Here I represent the 3 aspect of each topic. First aspect is the : General thinking – Perception – news run in media by critic , Second aspect is What Private company(Say RIL) have to say on the topic third one is the main and lesser known aspect which is the key to understand which one is the reality from first and second.

Least Start with the,

Hoarding of gas

Claim by critics / Allegation:  The Operation and Gas production start in 2009 in KGD6 basin. There should 80mmscfd Gas production as per the PSC (Contract) but it declaimed to 26mmscfd in December 2013 . Critic said Reliance do hoarding of gas to get Price hike.
Now Question arise how Price hike Possible due to Hoarding of gas? KGD6 basin gas is indigenous gas and due to that We have to import less from other countries, It save out foreign exchanges and it helpful to make economy strong. Due to hoarding we have to import more to feed the Power Houses which produce Electricity and Also to fertilizers producers. So, this allegation seems true that Private Company do hoarding of Gas.

Claim / counter by Private party – Hoarding of Gas no possible scientifically. Any attempt to hold back the production in existing field immediately shows up in the pressure anomalies in the affected wells. Such attempt may badly affect the other wells. The production decrees due to the Geological compatibilities.

Third aspect – KEY - To decide the Gas reservoir size and capacity is the most tough and risky works. Only few consultant work in this field in world. Even During the Contract signing Private company do not know the sixe and existence of any Field in area ( In Indian policy-NELP) . In Indian contact the procedure is as fallow > Private company do research ( KG basin area = 50000Sqkm) > Find reservoir  > Drilling > Projected the Quantity of Gas  à Make a Statement of Capital expenditure > DGH Accept it > Start production.

Private companies Generally Over estimated the Quantity of Gas reservoir. It Help them to Rise the funds from the international market and banks for their Projects. So this may be the case.

Gold Plating

It’s the core issue of the controversy. It’s a Complex issue. To understand it first need to understand the Model of private investment and working. In Any PPP project , Private company invest and Recover it’s cost from the service from user/buyer. 

In PPP based road project : Govt.Own the Land – Private company invest and construct the road – Take A toll for 15/20 years (as per contract). As same as in case of Gas – Govt. own the Reservoir – Private Company invest to search – drill – production. and then recover the cost by Selling the gas.

Claim by critics / Allegation:  Private Company overcharged the cost of the item and services used in the production of Gas. It facilitates the higher recovery for the private company and thus it increase the profit of it. Critics use the CAG report as to make the allegations of Gold plating ( CAG nowhere use this word – Gold plating in report).

Claim / counter by Private party: The production and the price of the natural gas is the lowest in the world. Company provides the Receipt of all the purchase.

Third aspect – KEY – The reason for the increasing cost is lie in the parameter used the contract called: Investment Multiple (IM ) . IM = Total revenue/Total investment. Mean the more the investment, lesser the IM . When IM is less than 1.5 – Private get 80% profit and Govt get 20% profit.  When IM is 2.5 – Govt.get 85% profit and Private get 15% profit. So by increasing the expenditure private company try to Put IM lesser than 1.5.

( Reason for such arrangement may be : In any business the profit/loss in proportional to the investment – When a private player ready to invest more in risky business than he has right to get more from profit)

Gas pricing

It’s the center point of debate. There are many scare stories running in the media about the price rise. Some say that Price rise may kill Indian Economy. It’s the simple topic to understand but the half knowledge the half media coverage make it complex. The problem is simple but Neither Private company nor Government ready to talk openly and firmly due to their own limitations and it’s create confusion. 

80%gas production is in the hand of public sector and RIL KGD6 gas only share of 15% in Indian Gas production. Then how this price hike effect overall economy of county?

KGD6 basin produces natural Gas. This Gas can not be stored, It need to Use. Gas is elated to Fertilizers – Power Production – Transportation – Oil Market – Banks – Market.

Lets understand with a small example : A person want to Invest in Gas based power project , Then He need capital for it – He goes to Bank for loan –Bank ask for the Source of the fuel – He have to sign agreement for Gas producer for the supply . In the same scene there are many Projects/plants who constructed on the reliance of the supply of the gas from KGD6 . Now due to the less production and Price hike due to that  these plants starved for fuel and many shut down. Due to this The employment of number of people and Bank loans in the risk.

Claim by critics / Allegation: The Cost of the production is $0.85/unit and Private company already getting $4.20 per unit, there is no need to price hike . BJP/Congress both work in favor of corporate. Price hike will imposed the additional Rs. 1.1lakh crore load on Indian economy and Private company will gain additional Rs.45000 crore profit. There will be Inflation in country and Common many have to pay the price.

Claim / counter by Private party: (1) As per NELP , The price is not depend upon the cost of production. (2) Hikes prices is the lowest in the comparison of the All other fuels. (3) Price hike benefited largely to the ONGC& GAIL  which are PSUs. (4.) Govt. Get More revenue in terms of Royalty.

Third aspect – KEY –

 (1) Yes it’s true that Price is not Depend on the cost and Private company have right to Decide the gas price but At the same time it’s also a true that Govt have right to place penalty in case of lowered the production of gas then estimated . So The project run on the co-operation of both party . Private company do not hike the price and Govt. not put penalty .

 (2) Yes, Price is lowest then other fuels but Other fuels have market and It can be stored . Take example of  LNG or Oil – both have price fixation mechanism and both can be stored in case of excess of production where KGD6 gas is natural gas its have not any international market and it can not be stored. 

(3&4)  Yes, Price hike benefited to Two PSUs ( ONCG&GAIL)  but it’s lost to other number of PSUs like NTPC , IFFCO etc. who use Gas for the production of Power and Fertilizers. It’s the Citizen of India and PSUs who have to bear the loss due to price hike and Private company and 2 PSUs will the gainers. So on the name of ONGC and GAIL – private company want to make profits.