Opinion

The right time to push oil sector reforms

Vikas Halan | Updated on January 22, 2018 Published on November 12, 2015

Deep pockets: And better policies needed for exploration

Deep pockets And better policies needed for exploration

With prices ruling low, a system to control fuel subsidy should be in place. Output incentives need to be sweetened

Brent crude prices averaged $55 per barrel in the first nine months of calendar 2015, after averaging just under $100 for all of 2014. The oil price environment should stay benign over at least the next 18-24 months, because global economic growth remains muted and supply levels are resilient.

Brent crude will therefore average $57 per barrel for 2016 and move up to $65 per barrel for 2017. This prolonged low price environment offers opportunities for countries such as India — which rely heavily on crude imports and provide large fuel subsidies — to institute reforms that will help the country cope when oil prices rise.

Subsidy sharing

While low crude oil prices and the deregulation of diesel prices halved India’s fuel subsidies to ₹762 billion in fiscal 2014-15 from ₹1.4 trillion in fiscal 2013-14, more can be done to ensure that fuel subsidies remain low and subsidy sharing between the upstream companies and the government becomes more transparent and predictable.

For example, a long-term subsidy sharing formula linked to a benchmark crude oil price can be implemented.

In a revenue sharing model, the upstream companies pay a percentage of their production revenues from the nomination blocks to the government directly, and the government shoulders the entire burden of providing fuel subsidies. Such a model will eliminate the uncertainty over subsidy sharing, and will allow the government to reap the full benefit of its efforts on the deregulation of fuel prices. And, if fuel subsidies are eliminated altogether, the government will continue to receive a share of production revenue from the nomination blocks. As for cess — a tax on production — the government could change the way that such an indirect tax is charged. Cess is fixed at ₹4,500 per tonne which currently equates to $9.3 per barrel.

Cess effect

Value-based cess can provide the government with the partial hedge against increases in crude oil prices. Such a hedge can compensate for the increase in the government’s fuel subsidy burden. It can also provide protection to the oil companies when oil prices fall, as their cess costs will be lower. In addition, value-based cess can correct the currency mismatch for upstream companies whose revenues, received in rupees, are linked to dollars, while their cess cost is fixed in rupees.

Such reforms will increase the transparency and credibility of the sector, and lead to further investments that are needed to reduce India’s dependence on crude oil imports.

Production policy

For every barrel of crude oil produced in India in fiscal 2014-15, five barrels were imported. In fact, the country’s trade deficit in the fiscal year ended March 2015 was nearly equal to the value of crude oil and petroleum products imported. India also imports nearly 40 per cent of its natural gas consumption.

Dependence on imports can only be addressed by accelerating exploration and production in the country or partly by overseas acquisition. At present, most of the production is undertaken by state-owned companies. Private-sector participation is through the New Exploration Licensing Policy (NELP). However, production from the blocks awarded under NELP has been small.

More than two-thirds of total crude oil production in India in fiscal 2014-15 was from the nomination blocks that were awarded to the state-owned, Oil and National Gas Corporation and Oil India Limited.

These blocks have matured and production rates are starting to decline. Consequently, if production rates in other domestic fields do not rise, India’s dependency on oil imports will increase further.

A large portion of future production growth may come from deep water fields, the cost of exploration and production for which is high. Such projects tend to involve huge upfront investments.

Moreover, given India’s current domestic natural gas pricing policy, any exploration of deep water fields — which may be heavy on gas — will not be economically attractive. A framework that includes incentivised pricing, along with a long-term take-or-pay agreement for production can revive interest in the blocks.

Dependence on imports can be partly addressed by acquiring assets overseas, for which the valuations are more reasonable now. The competition for assets from other oil majors and state-owned oil companies is lower, given the firms’ plans to cut investments.

The writer is the vice-president of Corporate Finance Group, Moody’s Investors Service

Published on November 12, 2015

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Sincerely,

Support Quality Journalism
null
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.