Gas pricing: Get govt out of the way

The contentious issue of gas pricing has evoked strong reactions from all quarters. Not wanting to be left out, everybody is jumping into the fray with his gyan on gas prices, either by dishing out their pricing formula or leveling allegations of scam, favoritism and so on.

Sample this: the Petroleum Ministry, Finance Ministry, Power and Fertilizer Ministries, political parties like Communist Party of India, BJP, Left, explorers like RIL, ONGC, GAIL, Cairn India, Oil India and experts like the Rangarajan Committee, the Vijay Kelkar committee, etc, have all been making statements in recent months about gas prices.

 

GAS PRICES AND COMPANY

 

 

The Rangarajan Committee on production sharing contract has arrived at a price of $8.80/mmBtu for gas from the current $4.2/mmbtu. The panel recommended the 12-month average of US’s Henry Hub, UK’s National Balancing Point and Japan’s liquefied natural gas price along with the average of the price of India’s LNG imports for arriving at the domestic price.

In line with Rangarajan Committee’s recommendations, Mukesh Ambani-led RIL and his partner UK’s BP Plc have also favored linking of domestic gas prices with international prices, seeking prices of around $12.5/mmbtu.

But the Power ministry has opposed the near doubling of gas prices saying it will raise the costs for power plants by over Rs 46,000 crore per annum.

 

GAS AVAILABILITY

 

 

The Finance Ministry has also rejected the formula and, instead, wants the panel to taken into account wellhead prices prevalent in Qatar, Oman, Abu Dhabi and Malaysia.

Sensing the backlash that was brewing over Rangarajan panel’s report, the oil ministry, recently, moved a cabinet note recommending a price of $6.8/mmBtu.

Amidst all this hoopla surrounding the pricing of gas, a key factor to consider is: why should the government be involved in fixing gas prices or for that matter any fuel?

Prices of fuels like gas and coal should be determined by the market based on demand-supply, taxes prevalent in states and levies on imports and exports, rate of inflation, availability of alternate fuels, etc.

 

RLNG INDIA

 

On pricing rationale, linking domestically produced gas with international prices makes little sense. While offering adequate incentives for producers in developing gas fields is a priority for recovering investment and a reasonable rate of return, using global prices as a benchmark for arriving at a cost for producing gas in India would be tantamount to exploiting consumers to benefit explorers.

From an economic standpoint, why should lawmakers be fixing prices? Let the explorer and industrial consumers negotiate the prices themselves, sign up long-term agreements for gas supplies? Let the buyers decide for themselves whether the price suits them or not.

As long as the gas pricing mechanism is controlled by the government, explorers like RIL and Cairn India will have no desire to produce more, forcing the economy to rely on coal and oil, both of which are neither eco-friendly nor available cheaply.

 

GAS DEMAND

 

Market-linked price also results in increased government share apart from eliminating unwanted consumption. Some analysts have also called for price discovery through a competitive, transparent bidding process by the contractors wherein all spectrum of buyers of natural gas participate in the process.

Taking about alternatives, the emergence of shale gas has been billed as a game changer. In the US, gas prices are at record lows as a surge in shale gas production coupled with lower demand has led to oversupply and record high gas inventories. The average price of gas at the Henry Hub has reduced from US$8.8 per mmbtu in 2008 to around US$2.9 per mmbtu in July 2012.

 

shale gas reserves

 

In India, shale gas formations are spread over several sedimentary basins such as Cambay, Gondwana, Krishna-Godawari on-land and the Cauvery. By initiating steps to identify prospective areas for exploration, shale gas can emerge as an important new source of energy and also pave the way for lower gas prices.

The country’s dream of energy security may turn into a reality only if its policies are aligned to meet the challenges facing all its stakeholders including the end consumer. But as it stands, everybody is allowed to have an opinion except the market.

 
CAIRN 289.20 10.80 (3.88%) GAIL 482.10 1.00 (0.21%) OIL 586.00 -1.20 (-0.20%) ONGC 399.95 -8.05 (-1.97%) RELIANCE 947.15 17.80 (1.92%)

Analysis: CAIRN

Today’s pick is CAIRN CAIRN 289.20 10.80 (3.88%). The stock started the year with a rush to Rs. 400. The momentum exhausted and left the stock plunging to Rs. 300 levels by May. The stock tested this support level quite many times since then and has just started moving up after breaking out of the pennant in late December. In the last three months, the stock has not moved at all vs. +6% move of the Nifty’s.

CAIRN technical analysis chart

Oscillators RSI and CMO are close to the over-bought territory but are not showing any bias.

The MACD line and signal line are moving very close to each other unable to suggest any short-term direction. Although decreasing histogram levels are pointing to an imminent short-term bearish move. Long-term and short-term GMMA lines are very close to each other and are not able to point at the direction of stock movement.

CAIRN correlation chart

CAIRN’s average correlation with the Nifty is 0.49 is positive. The scrip will be replicating the movement of Nifty. NIFTYBEES 807.00 9.66 (1.21%)

CAIRN volaitility chart

CAIRN has a historical volatility in the range of 0.2 to 0.6. The scrip’s volatility however is currently in the lower end of the range and hence should not be a concern to the traders.

Life insurance corporation of India bought Rs 1,291 Crore worth of shares on 3rd Jan in an insider trade instance.

Given these technicals, we suggest a short-term Hold. A Long-term call could be taken once the GMMA lines start to spread and give out a positive cue. It will be beneficial to have trailing stop-losses in place, in order to book profits if a trend-reversal were to take place.

Enhanced by Zemanta