Three reasons underpin my argument against price regulation: One, the Production Sharing Contract (PSC) that defines the financial relationship between the petroleum companies and the government is so structured that beyond a certain level of profits earned by the companies, the incremental revenues from increased production and/ or value is split disproportionately in favour of the government. Thus, if the profit split between the government and the oil company were 50:50 at a gas price of $3/mmbtu, then more likely than not, the government’s take on incremental earnings would increase to 70 per cent if the prices increased to $4 and to 90 per cent at prices beyond that.

I would hazard the calculation that if indeed the domestic production from the East Coast fields increases, as has been reported, from 20 mmscmd in 2008 to 40 mmscmd in 2009 to a plateau production of 80 mmscmd by 2010, then the revenue gain for the government from an increase in the price from $2.50/mmbtu (which is the price that the fertiliser and power companies are reportedly looking for) to $4.33/mmbtu (which is what the producers have reportedly asked for) could be somewhere between US $8-10 bn over the life of the project. Contrarily, this would be the loss to the public exchequer if the demand of the fertiliser/power companies were accepted. Incidentally, the international price of gas is around $6/mmbtu; several producers of domestic gas from fields in western India are currently charging more than $4.33/mmbtu.

Two, we must not forget the inherent risks in petroleum exploration. Commercial success rests on overcoming three uncertainties — that a given geology contains hydrocarbons; that the hydrocarbons will be located and that once located, the hydrocarbons can be commercially developed. The petroleum companies accepted these risks on the assurance that if they did locate the hydrocarbons the government would entitle them to sell the discovery at prices linked to the market and determined through an arms length process. This assurance was contractually secured through the PSC.

... contd.