Petroleum Minister Mani Shankar Aiyar's high-decibel efforts to woo investors as well as his pipe-dream (sorry, couldn't resist that) of getting natural gas all the way from Iran in a pipeline through Pakistan appear to have won the hearts of even cynical journalists, given the kind of applause he's got.

Though I appreciate that pipelines are a much cheaper way to transport petroleum products and that natural gas is in short supply in the country, I'm deeply sceptical of anything that flows through Pakistan since there's no real certainty the pipeline won't be blown up during the mostly non-honeymoon phases between our two countries.

There's a lot of talk of how once there's real money on the ground from companies that will build the pipeline and Pakistan gets transit fees of around $500-700 million a year, it will restrain militants from any pre-emptive action -- frankly if it was that simple, we'd have given Pakistan the money long ago and in any case a country which regularly sends across militants into our country can hardly be trusted.

Setting up power and fertiliser plants worth billions of dollars to utilise this gas would be extremely foolhardy unless the companies (mainly US ones) which set up the pipeline give you cast-iron financial guarantees that if supplies are disrupted, they will make good all losses caused.

This column, though, is not about the pipeline per se, but is about what Aiyar needs to do to get some serious investment in the country's oil sector.

Assume for the sake of argument that the pipeline is up and running, that the Pakistanis have a genuine turn of heart following Aiyar's impassioned pleadings and don't disrupt the pipeline, allowing us to get around 100 million metric standard cubic metres per day (mmscmd) of natural gas or 36.5 billion cubic metres per year from Iran and Turkmenistan. Who's going to pay for this?

The power and fertiliser plants who use the gas, right? Maybe, but let's not forget that today these users pay a fifth of the international price of gas -- today, ONGC [Get Quote] gets just around $1.2 per million British Thermal Units, or btu (1,000 cubic metres equal 40 million btu) as compared to the international price of around $5-6 per million btu.

Given that gas production in the country is around 70 mmscmd, that's an under-recovery of around $4�5 billion -- so, if prices of natural gas are not raised and another 100 mmscmd of gas comes in, that's an additional $6 billion the government will have to bear.

If gas prices are raised, then prices of power and fertiliser will have to be raised, and that's going to be a serious political hurdle. Indeed, Aiyar will probably be at the forefront of the agitation to prevent that since he himself has stopped the oil PSUs from raising prices in line with global ones on more than one occasion!

The problem, unfortunately, doesn't stop just here. India produces around eight million tonnes of LPG each year and sells this at $200 a tonne, which is half the current global price -- so there's an under-recovery of $1.6 billion on the LPG front. For the 10 million tonnes of kerosene, the under-recovery is around $3 billion based on global prices.

This irrational pricing, by the way, doesn't stop at just the oil sector but extends all over the energy sector, including coal, which provides over 55 per cent of the total energy supplies in the country.

While imported coal from Australia or Indonesia costs around $60-70 per tonne, Indian coal is priced at just around $20 -- once this is adjusted for the difference in thermal efficiency, Indian coal costs around $35-40. So, even if you were to increase prices of Indian coal by $15, Coal India Limited would get around $5.5 billion more for the 360 million tonnes it produces each year.

This irrational pricing does a couple of things. The first thing it does is to distort consumption patterns. When Gail wanted to supply gas in the Taj trapezium, for instance, it found glass-bangle and chandelier manufacturers preferred to use coal since this was cheaper, thanks to the artificial pricing of coal.

Fuel-guzzling power and fertiliser units also have no reason to improve technology since it doesn't cost too much if they are inefficient -- so, power plants in Bihar use nearly one kg of coal per Kwh of power produced, as compared to 0.64 kg in Gujarat, where the coal is more expensive. Larger differences can be seen in the fertiliser sector, where the best units use half the energy the worst ones do.

Two, it ensures producers don't invest in their business and even reduce production. The reason why imported coal gets used instead of Coal India's (despite it being cheaper even after the railway freight to, say, Tamil Nadu causes the price of coal to double) is that Coal India simply doesn't produce enough -- if, on the other hand, it got more money, this would get invested and better technologies would be used to extract a lot more coal.

ONGC, similarly, can go up to four million cubic metres per day in Tripura but extracts only 1.4 since it makes a loss on the production and wants to limit this. And if ONGC got international prices for its gas, as it does for its crude, it would invest more in exploration and in repairing fields as it has done in Bombay High.

Aiyar's been in the oil industry long enough to know this, but in case he doesn't, there are plenty of old timers who would tell him the story of how hundreds of crores were invested by private operators in the early 1990s, when the government allowed them to do parallel marketing of LPG with the promise that the subsidies would be removed.