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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 policy
framework. If indications are anything, the government has botched our
fuel future.

For any scarce resource, proper allocation can only occur through well -
regulated markets. This happens when such a resource follows price
signals. Distort the prices and you¶ve ens ured sub-par economic
performance. In the case of natural gas, India is an oligopoly with two big
players in the exploration and production (E&P) space and another two
big players in the downstream, transmission and distribution (T&D)
sector. The government, instead of striving for a more reasonable market
structure, has abetted the creation of this oligopoly. It is not only a
question of indulging in corrupt practices to favour one player over
another, 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 Natural
Gas Corp. Ltd (ONGC) and Reliance Industries Ltd (RIL), have won 62%
of the exploration blocks that represent 79% of the acreage auctioned so
far. ONGC has 59 fields and 397,000 sq. km and RIL 33 fields and
341,000 sq. km. In the T&D sector, again, there are only two significant
players, Gas Authority of India Ltd (GAIL) and its subsidiary GAIL Gas Ltd
and RIL and its subsidiary Reliance Gas Ltd. It does not matter if ONGC
and GAIL are government-owned and RIL is a private entity: The market
structure makes nonsense of price discovery.

What is alarming, however, is the fact that RIL is a vertically integrated

entity: it is a big player in both E&P and T&D spaces. Even more alarming
is the fact that the downstream sector regulator, the Petroleum and
Natural Gas Regulatory Board has inspired no confidence in managing this
problem. Unlike regulators in other sectors, it has little role in price
regulation.

Here it is important to stress how the government¶s mindset of ³scarcity

economics´, something recently highlighted by chairman of the 13th
Finance 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 natural
gas for these sectors because they are in no position to pay spot -market
determined prices as government controls their output prices. Thus the
government reasons that if you cannot pay the market price, the
commodity must be scarce. That is the road to oligopoly and inefficiency
and not the path to prosperity.