A little green thought

By Sunita Narain
Published: Tuesday 15 February 2005

What should be the price of natural gas in India? Till now, gas was pumped by the public sector company, the Oil and Natural Gas Commission and piped and sold by another public sector concern, the Gas Authority of India Limited. The government administered the price. But with private players entering the fray, there is a demand for a price hike and for deregulation. Already, liquefied natural gas (lng) -- natural gas cooled to minus 160 c for easy transportation and then re-gassed for use -- is reaching Indian shores from Qatar. The petroleum ministry has recently signed a deal for Iranian gas. What should be its price? And of gas supplied from Reliance-owned or other private and public domestic fields?

You may ask: what has this to do with environmental issues? A lot, in fact. The gains in combating vehicular pollution in Delhi have come because of this same gas -- compressed for use in automobiles. Many other smog-ridden cities are looking to emulate this model, a combined investment in natural gas infrastructure with a substantially increased public transport fleet. The cost of infrastructure is paid back because of a dedicated demand by buses for this cleaner fuel; the lower cost of fuel, in turn, is a fillip to public transport. There is enough evidence -- scientific, and now empirical Delhi-based data -- that emissions from Compressed Natural Gas (cng) equal emissions from the cleanest diesel (negligible sulphur content) that India says it is too poor to produce. So, the use of cng gives these cities a leapfrog option, particularly if combined with substantially enhanced public transport, at costs we can afford. A win-win situation.

But if this same gas loses its price advantage over polluting diesel, the strategy becomes unviable. So, you see, the issue of gas pricing is critical to environmental strategies.

But before we explore options, let us turn to questions undoubtedly assailing Union petroleum minister Mani Shankar Aiyar's agile mind. The problem is that unlike oil and its by-product, liquefied petroleum gas, the price of natural gas is not determined through demand and supply, in the form of the opec's evolved cartels. Gas is different. The capital costs for drilling over, the cost of extracting gas is minimal. There are no refining costs. The only cost involves pumping and transportation, so its pricing is often determined by the price of transportation and building pipelines, both long term investments.

Even lng, which involves an additional cost of cooling and re-gassification, does not change the equation too much. So, the world over, nations follow two strategies. One involves long-term price agreements on final delivery cost. The second links the price of gas to the basket of imported crude: broadly, if oil prices go up, so does the price of gas. India, reportedly, went the second way when it negotiated its first deal with Qatar, a method expensive to the consumer. But when the current government negotiated with Iran, it pushed for both a fixed price component and a floating component linked to crude.

A victory, no doubt. But a tricky question emerges: how to balance the price of this imported lng -- it has additional re-gassification costs -- with domestic natural gas? What principle will government follow, especially since domestic companies -- public and private -- are demanding their pound of higher price flesh? And since the big power and fertiliser companies, used to administered prices, are crying foul?

In all this, nobody quite cares for cng. It is, after all, a tiny part of the gas-energy market; so what if there are environmental benefits? The point, I would argue, is not to "subsidise" the fuel. It is to find ways of rewarding its relative "cleanliness" over polluting fuels. In other words, we need a policy for "environmentally acceptable fuels", for technically, there is really nothing like a clean fuel, as yet. And we need a separate policy for gas as an auto-fuel.

I say this because pricing natural gas linked to the basket of crude oil, whatever the formula, profits only gas sellers. For cng this strategy would be deadly. Two years ago, when oil prices were lower, we had calculated that full price parity with this black basket would increase the cost of cng sold in Delhi by over Rs 7 per kg, effectively destroying the green fuel programme.

It is also important to recognise that gas, when used in automobiles, has different markets and different costs associated to the infrastructure of compression and dispensing fuel. In the transport sector, cng replaces dirty diesel (petrol is much higher-priced because of the cross-subsidy to kerosene). Therefore cng pricing policy must be linked to the fuel it substitutes: diesel. But the policy must ensure a sufficient price advantage -- 20-30 per cent lower -- for this environmentally acceptable fuel, compared to the polluting fuel it is replacing.

Again, this price differential does not need new subsidies. What it needs is the creative use of fiscal instruments to see that the "bad" is taxed and the "good" given incentives. Delhi, for instance, does precisely this when it removes the sales tax on cng, but imposes it on diesel. But the Centre does not see a distinction: excise duty on cng increased from 8 to 16 per cent in the 2002 Union budget. Today, when polluted cities like Ahmedabad want to use gas, the price differential between diesel and gas is too insufficient an incentive. Now, the government wants to increase the price further.

But who wants this final nail in the cng -- and clean air -- coffin to be driven in? Not me. Not anybody who wishes to breathe clean air. As the upa government prepares to present its maiden budget, dare we expect it to pay heed to a little green thought?

-- Sunita Narain

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