In an earlier piece written for this Column, we had drawn an analogy between the mythical Sisyphus and Mukesh Ambani, equating the Reliance chieftain’s superhuman efforts to force the government to raise gas prices with the Sisyphean ordeal of rolling a boulder to the top of the mountain only to flounder when tantalisingly close to the objective.

The boulder has once again rolled to the bottom of the mountain – as far as Ambani is concerned – after a Panel of Four Bureaucrats, which was asked to hammer out a solution to the vexed problem of formulating an acceptable formula for pricing gas, failed to break the deadlock. The four worthies agreed that there ought to be a price hike but differed sharply on the quantum.

The Ministry of Petroleum and Natural Gas (MoPNG) is in favour of pricing gas at anywhere between $ 6 and 6.5/mmbtu. However, the Ministries of Fertiliser and Power do not support a price increase of more than 25 per cent above the prevailing rate of $ 4.2 /mmbtu. The ball has now been lobbed to the political leadership, which essentially means that Prime Minister Narendra Modi will have to take a call.

Which way will Modi go?

Significantly, GSPC, the state-owned gas producer of Gujarat, did not attend a meeting of gas producers convened by the government a few weeks ago on the ostensible ground that it received the invitation too late. Was this part of a grand design by Modi to ensure that he could keep everyone guessing? After all, GSPC, whose Field Development Plan for its Deen Dayal block in the KG basin was cleared by DGH at a gas price of $ 4.2/mmbtu, had demanded a price of $ 13 /mmbtu but then had gone into a silent mode. The GSPC price was similar to the one that Reliance had originally pitched for.

There is nothing unusual in interested parties lobbying to maximise their fortunes. But a government which has a system and a fair-minded bureaucracy will not allow anybody to take it for a ride.

We tried to understand the style and substance of the intense lobbying for the price hike and, surprisingly, found that Mukesh Ambani-controlled RIL was being maligned disproportionate to its sins: a situation that was strangely reminiscent of King Lear who was “more sinned against than sinning”. Reliance has more or less correctly reported to the government the actual cost of production of gas in KG D6. According to information furnished by DGH to Prime Minister’s Office, RIL had in 2009 reported the cost of gas at $ 0.8945 per unit and its partner NIKO at $ 0.43 to 0.47 per unit.

Again when the price of $ 4.2/mmbtu was being finalised for KG-D6 gas, the government wanted royalty to be decided on the basis of the well-head price. But B. Ganguly, who is widely regarded as a brilliant upstream executive within RIL, wrote to the government stating that royalty should be based on  a price of $ 1 /mmbtu as the  actual cost of production was only $ 0.98 /mmbtu. RIL and NIKO did report a higher cost subsequently because their production plan collapsed on the wrongly estimated reserves, which were revised down from 11 TCF to 3 TCF. The contentious question about who should bear the risk for wrongly assessing the reserves and creating infrastructure based on an errant estimate remains unresolved and we do not intend to comment on that.

The lobbyists followed an aggressive strategy which tarnished the reputation of not only Dr C. Rangarajan but also some of the foreign consultants who tend to treat India as some sort of a banana republic. It was a mistake on the part of the government to have appointed Dr Rangarajan to head a committee on gas pricing as he has virtually no experience in dealing with energy matters. Econometrics and monetary policy are his forte – and he has amply demonstrated his lack of familiarity with energy-related issues in the past. His note on the $ 4.2 /mmbtu price for RIL’s KG D6 had raised doubts about the way the number was arrived at. Nonetheless, he still went ahead and supported the price. The then cabinet secretary, K.M. Chandrashekhar, had questioned Rangarajan’s support for the pricing formula.

In the case of the downstream sector, Rangarajan dithered even on the economic logic behind trade parity pricing. Initially, he had agreed that the 80:20 rule had no economic logic but then went ahead with it. He also approved the report of Subba Rao on Hydro Power which was dubbed as foolish by experts.

Now, let us turn to the role of foreign consultants. They played a disastrous role from the very start in KG D6. We cannot expect Mukesh Ambani to go and discuss the reserves of KG D6 with consultants. It was done by his exploration chief, Rabi Bastia, who got Gaffney, Cline & Associates to certify the KG-D6 reserves around 11 TCF. Just when the country was slowly reconciling to the KG D6 tragedy that had wreaked havoc with the Indian economy, in came IHS CERA, a large US-based energy information company. Its presentation in Delhi last year was aimed at indirectly backing the Rangarajan pricing formula which, if implemented, would have raised the price of domestic gas to $ 8.4/mmbtu. “The presentation was a load of nonsense. It did not impress me at all and I decided not to attend the subsequent sessions,” said a senior executive working with a domestic gas producer. Its assessment is that deepwater gas production will require $ 8-12 /mmbtu and ultra deep water $ 10-12.

Why blame IHS CERA? It would not have known about the cost of gas already reported by the deepwater producers to DGH. In its view, domestic gas production would double if gas is priced at $ 10/mmbtu. That begs a question: How much did gas production go up by when the price was almost doubled to $ 4.2/mmbtu? From where will the gas come? Is India prolific in hydrocarbon reserves that it can produce any quantity on the strength of an ‘attractive’ price? A politician like Veerappa Moily could talk such rubbish but not a reputed company like IHS CERA which has to substantiate on what basis it was making such claims. Our information is that the presentation has not enhanced the image of IHS CERA in India.

It looked as if the lobbyists almost had their way on the gas price issue. The UPA government replaced Petroleum minister Jaipal Reddy with Veerappa Moily. Was it done at the instance of the gas producers lobby? We have absolutely no documentary evidence to say so. Moily who loved the Rangarajan pricing formula more than lived up to their expectations, but Kejriwal emerged as the spoiler when he managed to stall its implementation through the Election Commission. The fact that Prime Minister Narendra Modi, unlike his illustrious predecessor Dr Manmohan Singh, has a mind of his own made things slightly difficult for the lobbyists.

But has all that lobbying for a high gas price become infructuous? We don’t think so. We suspect that it points towards a gas price of $ 5.5 - 6/mmbtu. This is a big jump from the current level – for which the gas producers ought to thank the much-maligned Dr Rangarajan. Had he not ducked the opportunity to respond to the critics of his pricing formula, the price of gas would have been lower than what has now been recommended.

Rangarajan followed Falstaff’s dictum that discretion is the better part of valour.