By Shantanu Guha Ray
The government’s new Hydrocarbon Exploration Licensing Policy (Help) that brings in a single-licence, revenue sharing formula - replacing the existing multiple-licence, profit-sharing arrangement hated by companies - could change the face of India’s energy sector because investors wary over pricing issues are - finally - feeling a bit relieved.
The move came within two months after Prime Minister Narendra Modi - worried that no major oil and gas discovery has been brought to production in recent past - brainstormed with global oil and gas industry representatives in the Indian Capital on ways to attract investments.
The speakers, BP Plc.’s chief executive officer Bob Dudley, Royal Dutch Shell Plc.’s director (projects & technology) Harry Brekelmans, International Energy Agency’s executive director Fatih Birol and Pulitzer prize-winning American author Daniel Yergin, asked Modi to take a serious relook at India’s pricing and regulatory frameworks, even suggesting increasing the share of gas - say 20 percent by the year end - in India’s energy mix. It is not immediately clear if simplifying license rules and offering price benefits alone will help unlock gas and oil resources worth $40 billion.
For nearly a decade, contentious pricing issues pushed by the government have triggered fierce courtroom arguments, delaying production in gas fields once described among the world’s best finds.
Oil and gas companies were asked to offer products at stipulated rates to companies in steel, fertiliser business, the latter free to fix high rates of their final products and pick up increased cash from the markets. So why pin us down to your prices, asked the oil and gas companies?
The ministry did not budge, knowing very well India’s energy demand far outstrips consumption. It stuck on its regulated low prices for gas from prolific but challenging deepwater fields, deterring investment in the sector. Now, there is negligible investment, it has almost dried up.
Under the profit sharing agreement, companies would first recover their costs and then share profits. And the ministry had to sign off on the costs claimed by the developer. The ministry continued the process, even after realising it triggers disputes and delays the project.
But this time around, the government wants to reverse the game. It is promising the companies will have more freedom to set the price of gas from new discoveries and existing finds not yet in production.
The move has its benefits, it could help prevent future disputes over pricing and cost recovery of the kind the ministry has been embroiled in with Reliance Industries (RIL). Under the new policy, the ministry will not be concerned with the cost incurred and will receive a share of the gross revenue from the sales.
This is not all, the ministry has promised a common exploration licence for different hydrocarbons (oil, natural gas, shale oil and gas and coal bed methane). That means energy giants will produce whatever form of hydrocarbon is available from a licensed block without seeking permission for producing each of the fuels.
India, which imports two-third of its oil needs, is realising time is running out. The reduced government intervention could boost foreign investment in Indian oil and gas when global oil prices recover.
The new policy formula for difficult-to-extract gas will benefit companies such as RIL, Oil and Natural Gas Corp. Ltd, and Gujarat State Petroleum Corporation which have deep sea discoveries in licensed blocks yet to be brought into production. The companies will now be encouraged to develop their deep sea discoveries and realize a price higher than what gas from other fields fetches now ($3.8 per unit).
The forward-looking initiative will give a much needed impetus to the energy sector, more importantly, it will lead to the development of a competitive gas market in the country. It will also pave the way for a level-playing field between domestic and imported gas. Over a period of time, this concession should be extended to producing fields too.
By allowing competition to set prices, the ministry has offered early entrants the most incentive, while variable price cap will attract more exploration when global prices escalate. In short, companies will be provided calibrated marketing freedom, and also a pre-determined ceiling price discovered from global benchmarks.
The government hopes resources worth more than Rs 261,000 crore will be brought into production and there will be large scale employment. That is - actually - hopes on the sleeves, and in government files. First, the companies must show interest in India’s hydrocarbon market and not skip the country for next door Myanmar or far flung Vietnam.
Disclosure: Firstpost is part of Network18 Media & Investment Limited which is owned by Reliance Industries Limited.