Gas should be priced at least $10 in India: Fereidun Fesharaki

As chairman of FGE - FACTS Global Energy, Ferashaki counts most of the top oil and gas companies in the developed world as his clients and is also consulted by government and private companies in India. In a chat with Promit Mukherjee, Ferashaki ripped apart the Rangarajan Committee’s formula for  calculation of gas price and said the best way to reach a price for gas should be much simpler. Excerpts:

How do you think should gas price in India be calculated? Many stakeholders are not satisfied with the Rangarajan Committee formula...
Exactly. The method of calculation is very complicated. What has the United States got to do with us? Why are we using their prices to arrive at a price in India? I think what the committee did is to define a conclusion first and then tried to find ways to reach it. They anticipated the questions (which could follow) and decided to reach a price which will factor in all major prices of the world.

From an expert point of view, I think it is relatively simple to calculate a gas price for India. First, on consumption, do you prefer to have a low price, big imports and weak economy, or do you prefer to have a higher domestic price, less imports and electricity supplied to every sector?
So, for me, the right way is to see what is the best imported price India has achieved – that is the Petronet LNG price formula. Since 2004, nobody in the country has signed a better deal. So, I think you should take that formula and say that I have fixed the price at 75-80% of that formula and gradually every year I add 5% to it so that within 5-7 years, it reaches a justified price. I would index myself to my lowest import price and the best LNG contract signed for many many years.

Logically, I would say the current formula and current price is irrelevant.

If we index to Petronet’s 2004 price, what will be the price of gas in April 2014?
If the price of oil doesn’t change from today, then in April 2014, the price of gas in India should be $12.5 per mmBtu. If the price of oil goes to $80 per barrel, this price goes to $10 per mmBtu. If the price of oil goes to $150 per barrel, then it goes to $17 per mmBtu. Since my alternative is imports, I would index myself to the best deal the government has signed in imports.

Do you think the gas price the government has put forward will really help bring in foreign investment?
Honestly, the issue is not foreign investment, the issue is domestic investment. For foreign companies, India is always a low-priority region in the oil and gas space due to low hydrocarbon prospectivity and bureaucracy.

We have so many captive players in India who can invest, but they have to be incentivised enough through a proper gas price to invest.

Everybody is focussed on Reliance, but one should actually focus on GSPC and ONGC. GSPC is the most radical – they are asking for a gas price of $14 per mmBtu and ONGC is asking for $10 per mmBtu. Unless you reach a reasonable price figure, companies will not invest in the KG basin to produce. If you give the right price, then from the current 15 million metric standard cubic metres per day (mmscmd), the KG basin can reach up to 100 mmscmd.

So are you saying even with a price of $6.87 or whatever the formula reaches at the beginning of April 2014, nothing really will change in India?
No, it is not the right price. The right price should at least be $10 per mmBtu. With the currently calculated price, things might look up a bit, but the potential of the country is wasted.

Most of the newly built refineries in India are highly complex, which can use heavy/sour or cheap crude. But of late, the differential between heavy and light has been shrinking, affecting the competitiveness of Indian refiners. Will this phenomenon persist?
Yes, it will persist. The additional supply of African crude (sweet crude) is not used by the Americans, so more of its comes to the open market and its price falls, making it less and less expensive than sour crude.

Having said that, competitiveness of the refiners will not get affected as it has more to do with their strategies to sell, but yes, the profitability of the refiners will not be as good as it was a few years ago.