The Union government has received a notice from the Supreme Court (SC) on a petition filed by Independent Gas-based Power Producers Association (IGPPA) seeking priority in allocation of gas produced from the Reliance Industries Limited (RIL) operated Krishna – Godavari (KG) basin. The IGPPA has contended that the gas allocated from the KG basin was not allotted to them on priority basis but was given to fertilizer units. The Federation of Farmers Associations (FFA) has also filed a PIL in SC backing the IGPPA demand.
Earlier, in its order delivered in January, 2015, the Andhra Pradesh High Court (APHC) had refused to interfere with the government policy decision on the issue, saying the Centre has powers to fix priorities as to which sector would get natural gas produced from the KG basin. The petition now filed by the IGPPA and others seeks to challenge the order of the APHC. The unfolding scenario is bizarre.
It is a dangerous trend whereby the companies, industry associations and even farmers bodies are increasingly prone to taking matters to courts in areas which lie strictly within executive domain. Is it their case that instead of government, courts should start formulating and implementing economic policies?
To a large extent, actions of the government indulging in policy flip flops and taking decisions in an ad hoc, arbitrary and non-transparent manner, have largely contributed to this sordid state of affairs. The instant case provides a classic example of how priorities for gas allocation based on sound rationale have been unjustifiably fiddled based on short-term expediencies.
Economic advantage
In the 1970s, when gas finds were beginning to become available, the Lovraj Kumar Committee (1976) observed “national economy will derive maximum economic advantage if it is to be used in production of fertilizers”. This was reiterated by the Satish Chandran Committee (1979) which held “opportunity cost of lean gas/methane (after removal of higher fractions) would be maximum when it is used in production of nitrogenous fertilizers”.
Gas has ‘chemical’ value (hydrogen and carbon) which is optimally utilised in the production of fertilizer. Carbon-dioxide generated in the process is fully converted in to urea. Higher fractions - C-2, C-3, C-4 - are fruitfully used in the petrochemical sector. In power, gas is burnt even as chemical value goes waste. Carbon present in gas is converted in to carbon dioxide and emitted in to atmosphere. It adds to greenhouse gases and therefore, detrimental to environment. Accordingly, fertilizers were accorded top priority and entire available gas was committed to it.
The government planned addition to the urea capacity and infrastructure for movement of gas including laying of HBJ pipeline from Hazira (in Gujarat where gas produced in offshore area – Bijapur (Madhya Pradesh) – Jagdishpur (Uttar Pradesh) was planned on this basis.
Two world-scale ammonia/urea plants (1350/ 2200 tons per day) at Hazira and six such plants along HBJ pipeline were set up synchronizing with commissioning of pipeline. Two more plants of same size were put up at Thal (Maharashtra) using gas from Bombay High.
In the later half of t he 1980s when there were indications of gas surplus, a Committee of Secretaries (CoS) recommended its use in power plants as well even though the ‘first priority’ for fertilizer continued.
In t eh 1990s, despite anticipated surplus not fructifying and resultant gas shortage, powers that be went ahead allocating more gas to power while denying existing fertilizer plants their full requirements not to talk of no gas for new plants.
In 2000s, a major discovery by RIL in KG-D6 field held prospects for a substantial improvement in gas supply. In 2006, RIL promised to supply 80 million standard cubic metre per day (mmscmd) from the field.
Buoyed by this, the government permitted indiscriminate expansion of gas-based power capacity. But, in major volte-face, production from KG-D6 after reaching 60 mmscmd in 2010, plummeted to 26 mmscmd in 2012-13.
Reduced availability
Sensing that this would result in reduced availability for power sector, an empowered Group of Ministers in a meeting held in 2013, considered a proposal by Ministry of Petroleum and Natural Gas (MPNG) to re-prioritise allocation of domestic gas from RIL’s KG-D6 fields ‘to treat power on par with fertilizers’. The MPNG had proposed diversion of 10 mmscmd from fertilizer to power. However, a decision was deferred pending further examination.
Meanwhile, production from KG-D6 continued its downward trajectory to around 13 mmscmd in 2014-15 and further to 10 mmscmd currently which is assigned wholly to fertilizers. With this and 16 mmscmd from ONGC/OIL, fertilizer industry gets a total of 26 mmscmd against requirement of 47 mmscmd. This results in a huge deficit of 21 mmscmd forcing manufacturers to either import LNG [liquefied natural gas] or use alternate feedstock such as naphtha at higher rates. Despite the grim scenario facing fertilizers, if 10 mmscmd is taken away [as per MPNG 2013 plan], equivalent LNG import would cost the industry an extra Rs 4,500 crore per annum. Add Rs 9,500 crore excess amount already being spent to cover existing gap of 21 mmscmd (4500x2.1), the total additional burden will be about Rs 14,000 crore annually. In case the LNG price starts moving northward, the impact will be proportionately higher.
In view of the above, the government should emphatically tell the SC about the rationale behind its extant priority for gas allocation.
It should also state that policy formulation in regard to gas – a national resource - is strictly the government’s prerogative. In turn, the court should reject petitions of the IGPPA etc and save its precious time for other matters involving violation of law.
As regards the concerns of gas based power producers, while government has already given them a bailout package for short-term, in the long-term, exploration and development efforts need to be intensified to augment domestic gas
supply.
(The writer is a policy analyst)