Green signal

Petroleum Minister Mani Shankar Aiyar has done well to get oil diplomacy so firmly on the frontburner that the Cabinet has actually authorised him to begin bilateral and multilateral negotiations with countries like Iran, Turkmenistan, Bangladesh and Myanmar to get gas from these countries and, of course, Pakistan, through which the gas from the first two countries will have to flow.

And since so much about diplomacy is personal rapport, Mr Aiyar has also got the Cabinet to clear the transfer of Talmiz Ahmad from the external affairs ministry to the petroleum ministry to assist in the negotiations—it is only rarely, if at all, that the Cabinet clears the transfer of a bureaucrat from one ministry to another.

How important it is to get the gas is best seen from the fact that while the current demand for gas in India is around 150 million metric standard cubic metres per day (mmscmd), supplies are only around half this level.

While less than 10 per cent of India’s energy demand is met through gas, around a fourth of that in the OECD is met through it since gas is a cleaner fuel with a high calorific value.

By the year 2011-12, demand in the country is expected to rise to 216 mmscmd while supplies, including those from Reliance’s Krishna-Godavri basin, will be remain around 80 mmscmd; supplies from Bombay High will fall, and Reliance’s supply will make good the fall.

Now that the Cabinet has cleared the initiative, Mr Aiyar and his team will press ahead, but they should not forget the options that they have.

Conventional wisdom has it that pipelines are the cheapest form of transport, but LNG terminals offer a greater degree of flexibility and are more easily financed by the private sector, without government guarantees of the sort pipelines require.

There is, of course, the larger concern about any gas that passes through Pakistan and so getting iron-clad guarantees will be critical if the pipelines are to materialise—after all, who would want to set up a power plant based on gas through Pakistan if there is no guarantee that supplies won’t be shut off?

While annual payments to the government there ($700 million annually, says one estimate) are believed to be the best guarantee, this would have to be backed by bankable guarantees from suppliers in countries like Iran as well as the parties who finally build the pipeline.

Exposing any Indian producer who buys the gas without such guarantees (to make good the loss in profits if gas supplies are disrupted) would be reckless.

There is then the old issue of gas pricing. Today, ONGC is forced to sell gas at around a fourth or a fifth of the international price. While a government resolution said this was to stop in 2002, this has not happened yet.

If domestic prices continue to get subsidised while new supplies through pipelines are at international prices, the subsidy bill will balloon and become unmanageable.

Yet, hiking gas prices involves a difficult political battle since both fertiliser and power prices will have to be hiked significantly as well, as these are the principal user industries for gas.

In other words, if action is not taken to correct this flaw in domestic gas pricing, Mr Aiyar’s success could deliver a giant millstone around the government’s neck.