Gas pricing in India snowballed into a massive controversy over the past year. The experts had railed against the Rangarajan formula that priced gas at $8.30 per million British thermal unit, questioning the variables that were built into a carefully crafted equation.

But if that debate was contentious, trust it to have escalated to something bizarre. And this time it has nothing to do with either Rangarajan or Reliance Industries.

GSPC, a company owned by the state of Gujarat from where Prime Minister Narendra Modi hails, has now demanded a jaw-dropping price of $13/mmBtu for its gas from Deen Dayal West (DDW) in the KG basin, which is expected to go into production shortly. Worse, the output for the two proposed GSPC development wells will be a measly 0.8 million standard cubic metres of gas a day (MMSCMD).

It is natural that we turned to gas experts both within and outside the country to determine whether GSPC’s demand has any legitimacy at all.

Our inquiries reveal that there is no place in the world where dry natural gas at any well head is priced at $13/mmbtu. So why did GSPC make such a demand? Was it trying to take the Modi government for a ride? Or, was it trying to wangle a better price than anybody else?

At the outset, we must acknowledge that the DeenDayal block is slightly more complicated than other producing blocks in the country. But a gas price of $13/ mmbtu sounds atrocious. Clearly, the GSPC leadership team knows something that we don’t and is more resourceful than Rangarajan in persuading the Modi government to at least seriously consider its proposal.

There was speculation in the industry that GSPC would ask for a 14 per cent pre-tax rate of return on investment (ROI). Such a proposal should be welcomed if it is based on fully audited costs that exclude costs that are infructuous because of an incorrect estimate of reserves and, hence, creation of capacities that will remain under-utilized for a long time.

Expert say the $13 demand is not based on an approved capital cost or an ROI of 14%. It is based on a direct link to crude at about 12.5%. The existing price of $4.2/mmbtu for KG-D6 was also linked to crude but through an exponential formula and not a straight line route.

The Field Development Plan (FDP) which stipulates the capital expenditure is approved by the Directorate General of Hydrocarbons (DGH) and the Ministry of Petroleum and Natural Gas (MoPNG). The FDP is cleared after economic viability of the venture is established. While undertaking this exercise, the DGH would not have considered a gas price beyond $ 4.2/mmbtu.

We acknowledge that the CAPEX is not cast in stone – and that’s a truism that certain operators have already demonstrated.

There have been several instances where both the capital outlay and the reserves have been wilfully manipulated. No responsible government ought to allow a change in the capital cost and gas reserves beyond some reasonable (and duly approved) range of plus or minus 10-15%. The contractor must bear the risk if the amplitude of the variation exceeds this range.

Now let’s assume a scenario where GSPC is granted a price of $ 13/mmbtu. Will there be any takers for its gas? As per the production sharing contract, the price discovery has to be in line with the Gas Utilisation Policy of the government under which certain sectors are given priority in gas allocation.

If the price is right, everyone would buy. If the price is too high, no one would. This was clearly in evidence from NTPC’s power plant at Kayamkulam in Kerala. Defying all logic, Petronet LNG has been demanding a price of $18/mmbtu for gas (CIF Cochin port) from the Gorgon field in Australia. NTPC has baulked at the insane price and opted not to operate the power plant. As a result, the Vypeen LNG re-gasification plant also remains idle.

The NTPC argument is that no one would buy power from the company when generated at such a high cost. NTPC would, in effect, be subsidising the producers of the Gorgon field if it sold Kayamkulam power in Kerala at the cost of power purchased from Tamil Nadu!

GSPC, like any seller, wants a high price but will not be able to sell any gas unless it finds a buyer willing to pay that price. Buyers of gas in Gujarat are ready to pay only slightly more than $ 5.5/ mmbtu for gas. There is little doubt that even Gujarat Electricity Board won’t pay more than this price for the GSPC gas from the KG Basin.

But to suggest that a national policy will be framed to suit the needs of GSPC when even the Gujarat power generation plants may not pay a high price for gas is a rather pessimistic assessment about how the current government operates.