BackEnergy security in the age of cheap oil and gas
Vijay Kelkar panel has a message: prices have a bearing on energy security
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Two years is a long time in global energy markets. Prices can rise dramatically (as they did in 2007) or they can collapse with lightning speed (as has happened in the last one year). Two years ago, when a barrel of oil was routinely priced above $115, a beleaguered Union government was under great stress. Financially, the country could not sustain cheaply priced oil while politically, sharp revisions in oil prices were not feasible either. Now, all that appears to be a banished bad dream: cheaply priced crude oil and natural gas are not restricted to futures market but are available for spot delivery as well.
It seems incongruous to worry about energy security now. But if the price swings of the last two years mean anything, this will be a wrong conclusion to arrive at. That is the big takeaway from the report of the committee commissioned to find ways to reduce India’s import dependence of hydrocarbons by 2030. The report of the Vijay Kelkar panel—set up in March 2013 when oil prices had hardened greatly—was made public two days ago. While Kelkar explored the economic aspects of energy security comprehensively, pricing recommendations, especially for natural gas, form the heart of his report. The principles for pricing, so far administered by complex formulae, have avoided letting markets determine them. Kelkar has argued in favour of market prices and has also issued a roadmap for a smooth transition to market-determined pricing.
The report states that, “A rational and fair pricing policy for gas, an exhaustible resource, is vital in recognition of the principle of intergenerational equity. The principle of intergenerational equity implies that natural resource should be priced at the highest price possible in the market i.e. based on market-determined pricing." This idea may appear controversial, but it is not. Any exhaustible resource, be it oil or natural gas or minerals, once used cannot be generated again. Cheap pricing of these goods fails to address this basic issue: as their stock dwindles and demand rises (or even if it remains constant), their prices will only rise. This is an unfair situation for the next generations. It further adds that, “this (market pricing) will encourage domestic exploration and production activities, thereby making a contribution to the country’s energy security."
This process cannot be sudden but at the same time, it cannot be postponed to a remote future. At the moment, India has sufficient breathing room to change pricing policies without too much pain being felt by consumers. Market determined prices don’t imply a sudden freeing of all pricing arrangements.
In Kelkar’s roadmap, this requires re-engineering both supply and demand side arrangements. On the supply side, this requires effective regulation by the downstream regulator, the Petroleum and Natural Gas Regulatory Board to “ensure that transactions are conducted on a transparent arm’s length basis and contracts are at par with international best practices". In addition, development of coal bed methane, shale, hydrates and coal gasification will go a long way in augmenting supplies.
On the demand side, the most important reform required for energy security is the dismantling of the gas allocation policy. This is a remnant of the planning age. Allocation is no better than bureaucratic rationing of this resource. This prevents the identification of “true" gas demand. To end this, telling current producers to sell gas to a particular category of consumers should be discontinued.
These are radical suggestions and any move towards implementing them will run into political and bureaucratic hurdles. A step-by-step dismantling of the allocation procedure and the simultaneous development of pricing regulation can solve the issue.
India’s problem will be developing regulatory expertise and designing institutions that are robust to withstand regulatory capture given the nature and power of domestic hydrocarbon producers. That is a challenging task, but one that should not be postponed.
Should hydrocarbon prices be determined by markets? Tell us at views@livemint.com
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