(1888PressRelease)
May 25, 2007 - With India's domestic natural gas output projected to nearly double by 2010, the government has undertaken an exercise to device a pricing regime for the fuel that will aid growth in Asia's fourth largest economy. Reliance will start gas production from its prolific Krishna Godavari field next year while GSPC and ONGC are to follow suit in the next couple of years, triggering a mammoth exercise to fix a right pricing regime that is beneficial to both, producers and consumers. "Currently, we have two regimes – administered pricing for gas produced by ONGC/OIL and free market pricing for small quantities of gas produced by joint venture fields.
With 120 million standard cubic meters per day output (more than current availability at 91 mmscmd) expected from Bay of Bengal fields, inputs have been called from industry for shaping the policy," a petroleum ministry official said. Opinion expressed by experts on the issue at a recent industry seminar are being examined by the ministry, he said. At the seminar, Paul Deemer, a partner with Vinson and Elkins, said that regulated gas pricing deters investment and the government should leave prices to be fixed by free market forces. It should not get involved in gas pricing as long as it is an arms-length transaction. David Victor, professor of law at Stanford Law School, said pricing of gas in India would be driven by LNG which in-turn takes cues from prices at international gas exchange, Henry Hub.
Claire Spottiswoode of UK said regulators have no role in setting prices in upstream oil and gas exploration because suppliers need adequate incentives to compensate them for investment risks. Spottiswoode said multiple suppliers aided by third party access, which is competing for consumers, would encourage gas competition. "India should adopt a single legal jurisdiction, which would deal with all the issues at the national, state and the local level." Noting that India would continue to import liquefied natural gas (LNG), which would drive the prices, Victor said gas prices are more volatile than oil. "Higher volatility of gas implies India should have derivatives and other tools for risk management in place." State-owned companies, according to him, are very poor in developing gas resources.
"More important than geology, the business and regulatory environment should encourage the private sector. Private sector will only be encouraged if there is free market pricing of gas." Deemer said production sharing contract (PSC) for gas fields should allow for transfer of Minimum Work Programme obligations from a not-so-prospective block to the one that has better prospects. "In some cases, after carrying out some of the minimum work obligations it becomes clear to the company that the remainder of the work in a particular block is futile. Hence, the money earmarked for a not-very-prospective block would be better utilised in the interests of the nation in another block that is more prospective," he said.
He also said PSCs were designed primarily for oil. "Oil and gas cater to different markets and are.
different animals. There has be a separate PSC for gas."
