Is PMO moving to meet Ambani half-way on gas price hike?

By R Jagannathan

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The game of cat-and-mouse between Mukesh Ambani and the government over hiking gas prices is entering its final stages.

At stake is the huge stash of gas reserves in the Krishna-Godavari offshore gasfields (KG-D6) which Ambani owns, but which he is reluctant to part with at the government’s Scrooge-like price. At $4.2 per mmBtu (million metric British thermal units), Ambani is clearly getting less than a third of current market rates - and he is not about to gift it away.

[caption id=“attachment_228080” align=“alignleft” width=“380”]  Will Ambani get his way? It depends on whether PMO and petroleum ministry see a compromise as a lesser evil than giving in to its most powerful businessman.[/caption]

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The estimated landed cost of liquefied natural gas in March 2012 in India will be around $13.5 per mmBtu.

That’s why on 6 January Ambani fired his first shot seeking an “ amicable settlement ” on the pricing formula within 90 days. Among other things, Ambani said that he was being discriminated against, since the government was otherwise importing gas at much higher prices.

In its January letter Reliance said: “We wish to exercise our contractual right to market natural gas on the basis of arm’s length competitive sales to the benefit of all parties, including the government.We propose discussing with you a revised price formula consistent with Article 21.6 of the PSC (production sharing contract) and with a view to reaching an amicable settlement within 90 days of the date of this letter.”

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The 90-day deadline ends in the second week of April.

With energy prices taking off again after the Iran crisis, India’s oil and gas bills are going to bloat - and fertiliser and power plants are going to be hit. Since these sectors are among the most subsidised - the government is clearly in a bind.

It has two options: one is to try and call Ambani’s bluff; the other is to work out a compromise on pricing where Ambani gets a bit of what he wants, and the government does not end up having to import all the stuff at higher cost.

The government has now half-blinked. According to The Indian Express, the Prime Minister’s Office has asked the petroleum ministry whether it is legally possible to raise prices for Ambani.

This, of course, does not mean Ambani will get his way, but it does mean the government knows it is on a weak wicket in a market where import costs are rising, and the fiscal pressure is pushing it towards deregulating (or raising) diesel, kerosene and cooking gas prices after the Uttar Pradesh elections.

Logically, no government can say that it will raise other energy prices and keep a lid on gas prices alone.

The Express report quotes a PMO letter to Petroleum Secretary GC Chaturvedi to “consider obtaining legal opinion on the matter and place it before the EGoM (empowered group of ministers) on gas.” This EGoM is scheduled to meet in March.

While a hike in petrol prices is sure to happen, diesel prices may be in for a compromise where there may be a small immediate hike, and an increase in taxes on diesel passenger vehicles in the budget. The oil marketing companies are currently losing Rs 465 crore a day in subsidising diesel, kerosene and cooking gas.

Under the current arrangement, the prices of natural gas are due for a reset only in 2014. But Ambani’s deadline for action ends in the second week of April.

Will Ambani get his way? It all depends on whether the PMO and the petroleum ministry see a compromise as a lesser evil than giving in to its most powerful businessman.