Court Verdict Disappoints Supporters of Free Gas Pricing

It wasn’t just the Ambani brothers and their political friends that were keenly watching the Supreme Court verdict on the natural gas pricing dispute. The entire energy industry—especially the protagonists of free market pricing—was following it too. For, a verdict in favour of Anil Ambani would have effectively stripped the government of its control on gas pricing and achieved a policy coup that years of lobbying in New Delhi had failed to.

But it was not to be. The court order has reaffirmed the status quo, leaving “resource nationalists” happy but free pricing supporters sulking.

First a quick primer on gas pricing in India: The government wants to ensure adequate supply of gas to fertilizer and power companies and so forces producers to sell it at subsidized rates. They have to hold this price irrespective of the price changes in the global market. For instance, natural gas price has fluctuated between as low as $1.44 per million British thermal units to as high as $13.42 in the last 15 years. But Oil and Natural Gas Corp., India’s largest producer of gas, even now sells it at less than $2.

Given that the shortfall between demand and supply has been large, the clamour for freedom to producers to price gas in line with market conditions has become louder with every passing year. The government, too, set up several committees to look into the matter, but a political consensus on this sensitive issue has proven elusive.

The acrimonious court battle had raised questions about whether a private pricing contract would prevail despite the government’s policy to control pricing and distribution. That has been clarified now. As Reliance Industries said in a statement on Friday, “RIL can sell gas only at the price approved by the Government and only to the entities who have been allocated gas under the gas utilisation policy. RIL has no ability to deviate from price, quantity and tenure as determined under government’s policies, or to discriminate amongst various consumers.”

Viewed in this context, the Supreme Court ruling on the Reliance gas dispute signals that there is no legal or Constitutional factor that can overthrow the administered pricing mechanism (APM). Its impact will be felt in the coming days and months when any buyer of Krishna-Godavari gas will be required to pay the $4.2 price that the government has fixed and new investors into the sector will be required to consider the price control factor before making their bids.


The impact of the Supreme Court order could also spill over to another sensitive area: The freeing of prices of petrol and diesel. The government’s right to control energy prices will not be under question anymore and will even strengthen the arguments of those in the Cabinet who support the continuation of APM. Even as the oil minister, Murli Deora, welcomed the judgment, the government is reviewing the Kirit Parikh Committee’s guidelines on making the transition to market prices. As oil prices harden, the petroleum ministry’s decision will certainly be more difficult to implement.

Gas is priced is at three-four levels in India today. The administered pricing, for gas sold by government companies, is different for customers depending on their ability to pay. Power companies get gas at a lower price than fertilizer companies. The consortium that owns the Panna-Mukta-Tapti field is the only indigenous gas producer that is free to price its throughput. The joint owners, Reliance Industries, ONGC and British Gas, sell gas at $5.7/mmbtu and are working hard to increase production from the fields that are declining. The third category is imported gas, in which case prices are fixed for the long term depending largely on cost price.

With Reliance’s discoveries adding substantially to India’s gas resources, many had expected a robust market for Indian gas to develop. The industry even expected an Indian benchmark price to evolve. Such a market—like in the North Sea, Europe or the Henry hub in the USA—brings together buyers and sellers whose trading activity leads to price discovery for the region. As long as the government control of gas pricing is maintained, this will not happen in India.

India is not alone in wanting to control energy pricing. The trend of “resource nationalism” is growing the world over and national governments, wanting a pie of the energy price rises, have imposed their writ on the energy industry. This is done in different ways. In oil rich West Asia, foreign companies are only allowed to have service contracts and have to settle for a status similar to financial investors. Brazil, which has made significant finds in its pre-salt offshore recently, taxes an operating company for any “windfall profits” accruing from serendipitous large findings. Some countries are changing laws to make it difficult for foreign companies to own any new fields.

Ironically, the judgment could have a negative side effect for a government-run company. The National Thermal Power Corp. (NTPC) is also fighting RIL in the Bombay High Court to get the latter perform a winning bid it made years ago to supply 12 million units per day of gas at $2.34 per unit. But a formal gas sale agreement was never concluded. RIL has subsequently refused to supply gas at this price. The judgment does not cover NTPC’s case per se, but it has made it unlikely for the company to get the gas at that low price.