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A Natural Gas Oligopoly

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A natural gas oligopoly Natural gas has the potential to prime India¶s economic growth. But the government, instead of striving for a more reasonable market structure, has abetted the creation of an oligopoly If there is one fuel that has the potential to prime India¶s economic growth in the future, it is natural gas. An estimated 37 trillion cu. ft of reserves available can power the country for considerably longer than its oil resources. This, however, is dependent on the presence a right poli
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  A natural gas oligopoly Natural gas has the potential to prime India¶s economicgrowth. But the government, instead of striving for amore reasonable market structure, has abetted thecreation of an oligopoly If there is one fuel that has the potential to prime India¶s economicgrowth in the future, it is natural gas. An estimated 37 trillion cu. ft of reserves available can power the country for considerably longer than itsoil resources. This, however, is dependent on the presence a right policyframework. If indications are anything, the government has botched ourfuel future.For any scarce resource, proper allocation can only occur through well-regulated markets. This happens when such a resource follows pricesignals. Distort the prices and you¶ve ensured sub-par economicperformance. In the case of natural gas, India is an oligopoly with two bigplayers in the exploration and production (E&P) space and another twobig players in the downstream, transmission and distribution (T&D)sector. The government, instead of striving for a more reasonable marketstructure, has abetted the creation of this oligopoly. It is not only aquestion of indulging in corrupt practices to favour one player overanother, but that of a mindset that favours oligopoly. In such a situation,price discovery is impossible and price distortion a certainty.Consider the facts. On the E&P side, just two contractors, Oil and NaturalGas Corp. Ltd (ONGC) and Reliance Industries Ltd (RIL), have won 62%of the exploration blocks that represent 79% of the acreage auctioned sofar. ONGC has 59 fields and 397,000 sq. km and RIL 33 fields and341,000 sq. km. In the T&D sector, again, there are only two significantplayers, Gas Authority of India Ltd (GAIL) and its subsidiary GAIL Gas Ltdand RIL and its subsidiary Reliance Gas Ltd. It does not matter if ONGCand GAIL are government-owned and RIL is a private entity: The marketstructure makes nonsense of price discovery.What is alarming, however, is the fact that RIL is a vertically integratedentity: it is a big player in both E&P and T&D spaces. Even more alarmingis the fact that the downstream sector regulator, the Petroleum andNatural Gas Regulatory Board has inspired no confidence in managing thisproblem. Unlike regulators in other sectors, it has little role in priceregulation.Here it is important to stress how the government¶s mindset of ³scarcityeconomics´, something recently highlighted by chairman of the 13thFinance Commission Vijay Kelkar, has contributed to the mess. The  government has a list of sectors it wants to allocate gas on priority.Fertilizer and power generation top this list. It has had to reserve naturalgas for these sectors because they are in no position to pay spot-marketdetermined prices as government controls their output prices. Thus thegovernment reasons that if you cannot pay the market price, thecommodity must be scarce. That is the road to oligopoly and inefficiencyand not the path to prosperity.

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Nov 2, 2017
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