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Making gas more natural

india Updated: May 25, 2010 22:12 IST

The less controls there are on fuel prices the less likely India will suffer from power. Energy subsidies and administered prices have generated highly questionable social dividends. But what they inflict in terms of low investment in production and transmission, as well as red-inked balance books for oil companies, is not in doubt.

Which is why the government’s decision to raise the price of natural gas sold by state-owned firms to the level of private sector firms is welcome. One consequence will be higher cooking gas and electricity bills. But the fields producing the lower-priced gas have been running out. Without a higher price, the new fields would not have been tapped and future fields will not be discovered. Cheap gas would, in the long run, have meant a shortage of gas.

Natural gas, even more so than nuclear power, has the potential to transform India’s energy sector. The discovery of large domestic offshore gasfields, a global glut of gas from shale deposits and a steady expansion of the infrastructure needed to distribute gas, has made this fossil fuel the country’s most likely energy alternative to imported oil and dirty coal.

However, natural gas requires huge initial capital expenditure. This, in return, requires that those paying for the infrastructure be confident of making profits from their long-term investments. At present, gas in India is a bizarre pricing regime with costs ranging from $ 2 to $ 7 per million British thermal unit. Different buyers, like fertiliser and power companies, have carved out politically determined pricing arrangements for themselves.

This is the uneven landscape that needs to be replaced with a more level pricing topology. This is an already stated government objective. Wiping out the difference between State-owned and private prices is a relatively easy step. Reducing the gap between domestic and imported gas prices will be more difficult. Lobby groups are already asking for what amounts to a new administered price mechanism with sectoral or regional billing systems. This would only replicate and aggravate the pricing system that held back the country’s gas for decades.

India should have a spectrum of gas prices — but a narrower band that is based on market forces. This will not be easy. Political lobbies like those of rich farmers will seek their pound of urea. And, ironically, the sparsity of India’s gas infrastructure mitigates against price equalisation. Which is why, when it comes to energy reforms, New Delhi needs to continue to step on the gas.