With India’s show piece oil and gas exploration policy running into disputes, the pre-Budget Economic Survey today called for clarity in the policy as well removing distortions in fuel and natural gas pricing.

“The short-run action needed to remove impediments to implementation of projects in infrastructure, especially in the area of energy, includes... clarity in terms of the New Exploration Licensing Policy (NELP),” the document tabled in Parliament by Finance Minister P Chidambaram said.

The cost recovery model of the NELP, which allows operators to recover all their investment in successful as well as unsuccessful wells from sale of oil and gas before sharing profits with the government, had come in for tough criticism from official auditor CAG.

CAG felt the cost recovery model incentivises firms to keep raising investment to postpone government’s profits.

While the Survey did not elaborate on what clarity was needed in NELP, the pre-Budget document said “the long term strategy should focus on issues like... petroleum price distortion (and) natural gas pricing.”

“The government appreciates the economic role of rational energy pricing. Rational energy prices provide the right signals to both the producers and consumers and lead to a demand—supply match, providing incentives for reducing consumption on one hand and stimulating production on the other,” it said.

Aligning domestic energy prices with the global prices, especially when large imports are involved, may be ideal option as misalignment could pose both micro and macro economic problems, the Survey said.

“At microeconomic level, under-pricing of energy to the consumer not only reduces the incentives for being energy efficient, it also creates fiscal imbalances,” it said, adding that under-pricing to the producer reduces both his incentive and ability to invest in the sector and increases reliance on imports.

While auto and cooking fuel are sold at subsidised rates, natural gas also is priced at rates way lower than global rates. Companies such as Reliance Industries and BP Plc of UK have been seeking higher gas price as the current $4.2 per million British thermal unit rate was not commensurate with cost.

“Over the years, India’s energy prices have become misaligned and are now much lower than global prices for many products. The extent of misalignment is substantial, leading to large untargeted subsidies,” the Survey said.

It said the government was “reviewing pricing under the production sharing contract (PSC) to clarify the extent to which producers will have the freedom to market the gas.”

(This article was published on February 27, 2013)
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