The cut in diesel prices by Rs 3.37 per litre and the announcement of the new pricing for natural gas are welcome developments. While the diesel cut could have come earlier, given that global crude prices dropped 25 per cent since June, the deregulation of diesel will usher in a new era for consumers and oil marketing companies. It should also lower inflation to a significant extent and reduce the government’s subsidy bill considerably.
World crude prices are now declining and will do so for a while as crude supply far exceeds demand due to slowing global economies and over-production by the United States and the Arab oil-producing countries. But the government should offer disincentives for the rich to buy gas guzzling cars and reduce the gap between petrol and diesel prices.
The pricing of natural gas had been hanging fire for nearly two years due to unacceptability of the irrational and unjustifiable price recommendation by the Rangarajan Committee and others. The Narendra Modi government rightly rejected the recommendation for a hefty increase of $8.4 per million British thermal units (mBtu) and fixed a price of $5.61 per mBtu from November 1. The current price is $4.2 per mBtu.
The new price has been welcomed by India’s national giant oil explorer ONGC. Its chairman D.K. Sarraf said every $1 hike in the price would add Rs 4,000 crores to its annual revenue and Rs 2,500 crores to its bottomline. The government has promised a premium (unspecified) over the new price for new discoveries ultra deep water areas, deep water areas and high temperature-high pressure areas.
Private sector petroleum major RIL is, however, not expected to benefit from the new pricing as it is involved in an arbitration case with the government over falling gas production from the K.G. Basin and until it meets the shortfall, RIL will have to credit the difference between the revised price and the earlier price of $4.2/mBtu to a gas pool account maintained by GAIL. RIL’s gas production has fallen gradually from the promised 60 million standard cubic metres a day (mscmd) in 2011 to just 12 mscmd in the last one year.
It is a significant natural gas producer and its inability to keep targets has caused crores worth of losses to the power and fertiliser sectors that depended on RIL gas. So while the gas pricing issue may be out of the way, gas availability is still a major issue. RIL and its partner BP have planned huge investments in oil exploration based on a price of over $8 per mBtu. It is not certain whether they will go ahead with these plans at the new price of $5.6/mBtu. The government will have to find a solution.
