15 December 2015 16:35:45 IST

Giving a boost to the energy sector

The oil and gas sector is seeing a lot of reforms and policy action

Is the Modi sarkar walking the talk on economic and policy reforms? The response would likely be ‘half-full’ or ‘half-empty’, depending on whom you ask. But one sector that has seen considerable progress — without encountering the all-too familiar Opposition roadblock — is oil and gas. Several decisions over the past year and a half have sought to address the bugbears that have affected hydrocarbon companies for long. Sure, some of these were made possible by the rout in the crude oil price and the steps initiated by the previous UPA regime. But the Centre deserves credit for not letting the opportunity go and sustaining the momentum.

Pricing reforms

Making the most of the crude oil rout, the Centre decontrolled diesel pricing late last year – just as petrol pricing was freed up back in 2010. Diesel was the biggest contributor (almost 60 per cent) to the under-recoveries of the public sector oil marketing companies (OMCs) — Indian Oil, HPCL and BPCL — as a result of selling fuels below cost. Also, the subsidy on domestic LPG was restricted to 12 cylinders a year for a household and this subsidy too is now being transferred directly to customers’ bank accounts.

The ‘GiveItUp’ campaign, urging well-to-do customers to voluntarily give up LPG subsidy, has also been fairly successful. These measures have slashed the under-recoveries significantly, from nearly ₹1,40,000 crore in 2013-14 to about ₹72,000 crore in 2014-15. This has restored the financial health of the OMCs to a good extent. With crude oil now trading at multi-year lows due to weak global demand and oversupply conditions, under-recoveries should be much lower in 2015-16. So, the problem of divvying up the under-recovery burden among the OMCs, oil producing companies (ONGC and Oil India) and the Centre is far easier to address now.

Also, unlike the past, the government has given, in advance, clarity on the subsidy sharing mechanism for 2015-16. So, ₹12 a litre on kerosene and ₹18 a kg on LPG cylinders will be shouldered by the Centre; the rest of the burden will have to be borne by ONGC and Oil India. Ergo: the OMCs will get fully compensated. Given the continuing decline in crude oil prices (Brent now quotes at under $40 a barrel), there is a good case for exempting the beleaguered oil producing companies too from the sharing the remaining subsidy.

Building up reserves

The timing of the crude oil rout coincided fortuitously with the long-delayed completion of the country’s first strategic oil reserve — the 1.33-million-tonne (mt) underground facility in Visakhapatnam. This facility has now been filled with oil bought cheap, and steps are underway to put into operation the 2.5 mt Padur facility and 1.5 mt Mangalore facility too — reports suggest that these should be able to take in the oil reserves by March next year.

The Centre plans to build four more strategic reserve facilities over the next few years — this should be expedited. For a heavily import-dependent country like India (nearly 80 per cent of our oil needs is met through imports), saving the black gold for a rainy day is critical. Energy prices have been historically volatile; they could head north again without warning. So, it’s best to stack up now and not be complacent about low prices.

Pep to production

The country’s oil and gas output has been declining, with a consequent rise in import dependence. Several global hydrocarbon biggies, bogged down by long procedural and regulatory delays, have also voted with their feet. This is despite most of the country’s sedimentary basins being not yet fully explored.

To reverse the trend, the Centre has, over the past few months, taken two key steps. First, it decided to auction 69 marginal oil and gas fields surrendered by ONGC and Oil India on terms quite different from those in previous auctions. So, the complicated cost-recovery model has been replaced by the easier-to-implement revenue-sharing model. Bidders have also been allowed pricing and marketing freedom. Successful bidders will also be given a unified licence that allows production of all hydrocarbons.

Extending the marginal field auction terms to future acreages too, the Centre has proposed a new exploration regime. In a paradigm shift, the new regime proposes the revenue-sharing model, a unified licensing policy, an open acreage policy that provides on-tap bidding of hydrocarbon blocks, and pricing and marketing freedom for natural gas.

Unlike crude oil, the price of natural gas is currently not market-linked. The long-overdue pricing formula for domestic gas was implemented by the government last year. But this fell short of expectations. The formula is a weighted average price of four global gas benchmarks — which don’t really reflect the realities or the supply sources of the Indian gas market. Consequently, with these global benchmarks under pressure, Indian domestic gas has also been priced quite low, though imports (which meet about 40 per cent of our needs) come at a costlier rate.

As it stands, the liberal terms in the proposed new exploration regime (that gives pricing and marketing freedom for gas) would apply only to blocks to be auctioned in the future. They would not apply to already bid-out or producing blocks that have to sell gas at the formula-based price; this would remain a sore point.

Pressing the advantage

The Centre also seems to be tasting success in pressing its advantage in what is now essentially a buyers’ market in oil and gas. Reports suggest that Petronet LNG, the biggest oil importer and regasifier in India, has been able to renegotiate its long-term LNG contract price with Qatar’s RasGas to align it with current market rates.

If the news is confirmed, the price of long-term gas cargoes could fall from about $12-$13 an mmbtu to nearly $7 an mmbtu. The promoters of Petronet are government-run energy companies. There are also reports that some of West Asia’s big oil producers have agreed to sell the fuel on favourable terms to Indian oil companies.