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Oil & Gas: High on energy

Anand Kalyanaraman | | Updated on: May 22, 2016
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Campaigning in last year’s Delhi polls, Prime Minister Narendra Modi urged voters to elect the lucky one — the BJP. Voters didn’t oblige. But Modi was bang on about his government’s fortune with the economy, at least energy prices. In June 2014, just a month after he took charge, the rout of crude oil began — it has fallen about 60 per cent since then to $50 a barrel currently. This has paved the way for big reforms in the oil and gas sector. The government deserves credit for making use of the opportunity.

Pricing reforms

A key reform was the freeing up of diesel pricing in October 2014. Unshackling diesel — the biggest contributor (about 60 per cent) until then to under-recoveries — had a salutary effect on the finances of the public sector oil marketing companies (OMCs) Indian Oil, BPCL and HPCL. So did the direct bank transfer of LPG subsidy to customers’ bank accounts and restricting the subsidy to 12 cylinders a year for a family. The upshot: under-recoveries incurred by the OMCs from selling fuels below cost have been slashed from nearly ₹1,44,000 crore in 2013-14 to about ₹28,000 crore in 2015-16. Clarity on subsidy sharing also benefited upstream companies ONGC and Oil India.

The government has been smart in sharing the spoils — cutting fuel prices at the pump on one hand, and regularly raising excise duty to shore up the exchequer, on the other. The filling up of the strategic oil reserve facility in Visakhapatnam and acquisition of hydrocarbon assets abroad by state-run oil companies was timely. So was the successful re-negotiation of the long-term LNG contract price with Qatar’s RasGas to align it with current market rates; this helped gas importer Petronet LNG and also made supplies cheaper for city gas distributors such as Indraprastha Gas.

Though it did not go the whole hog, the government has taken steps to encourage domestic oil and gas production.

Exploration push

A formula for pricing domestic gas was approved in late 2014. While an improvement over the ad-hoc price fixation prevalent until then, the formula — a weighted average price of four global gas benchmarks — is not market-linked. Last September, the government proposed liberal rules for auction of the marginal blocks surrendered by ONGC and Oil India. And in March this year, many of these liberal terms were extended to the HELP (Hydrocarbon Exploration Licensing Policy) regime that will replace the NELP (New Exploration Licensing Policy) for block auctions in the future.

Key changes in HELP include an easy-to-implement revenue sharing mechanism in place of the profit sharing model, a unified licence that allows production of all hydrocarbons, and the flexibility to bid for any block on-tap under open acreage licensing. Explorers have also been given pricing and marketing freedom for new gas production from difficult terrains, but this is subject to a ceiling based on the import price of alternative fuels. These measures should encourage companies such as ONGC, Oil India and Reliance Industries. Also, the government extended the production sharing contracts for 28 small, medium-sized and discovered fields.

Published on January 20, 2018

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