India is heavily dependent on imports for its energy needs viz. 83% in crude oil and 45% in gas. Prime Minister, N Modi has proclaimed his government’s commitment to reduce the import dependence on oil to 67% by 2022 and further to 50% by 2030. Meanwhile, two major developments on the global front are giving jitters to our policy makers.
First, the OPEC [Organization of Petroleum Exporting Countries] – a cartel of exporters from the middle-east – which supplies over 80% of India’s oil imports – has decided to continue their planned cut in output [a strategy that was initiated from January 1, 2017]. Together with reduction in supplies from non-OPEC countries led by Russia, this will continue to affect global supplies.
Second, re-imposition of US sanction against Iran has resulted in cutting-off supplies from that country which is the third largest exporter of oil to India [even as sanctions were resurrected in November, 2018, India along with eight other countries got exemption for a while which have ended now].
The above developments could lead to steep increase in the price. The impact of cut-off from Iran will be particularly severe as on those supplies, India gets waiver of insurance and freight charges besides longer credit period even as supply from alternate source such as USA will come at a much higher price. Besides, not all refineries are equipped to process lighter crude coming from the US.
The price surge can have a devastating effect on our current account deficit [CAD] besides upsetting government’s fiscal math. No wonder, Team Modi has swung in to action with his chief strategist Amit Shah who is also the home minister, taking a meeting [June 4, 2019] to review plans for increasing domestic production of oil and gas as also for acquiring assets in oil and gas rich countries.
Modi – government has been seized of its urgency from the time it commenced its first term and taken a number of initiatives in pursuit of the goal. Yet, if these are far from delivering the intended results, the reasons are primarily three-fold.
First, there are multiple pricing regimes depending on the source of supply. For supplies from fields awarded under the New Exploration Licensing Policy [NELP] [this was launched in 1999] and blocks given on ‘nomination’ basis to oil and gas PSUs viz. Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL] under pre-NELP, the price is a weighted average of prices at 4 global locations viz., Henry Hub [USA], NBP [National Balancing Point] [UK], AGR [Alberta Gas Reference] [Canada] and Russian price. The supplies from deep/ultra-deep, high-pressure/high-temperature [HP/HT] fields are allowed the so called ‘premium’ price linked to alternate fuels such as fuel oil, naphtha, imported LNG [liquefied natural gas].
The supplies from fields given under Hydrocarbon Exploration Licensing Policy [HELP] or Open Acreage Licensing Policy [OALP] – launched in July 2017; unconventional hydrocarbons viz. coal bed methane [CBM], shale gas etc from all fields [including those awarded under NELP]; ‘marginal’ fields taken away from ONGC/OIL and auctioned to private companies get ‘market-based’ pricing.
Further, for fields given under pre-NELP wherein the long-term agreement with the operators did not require approval by the government, the prices as mentioned therein apply.
The pricing structure is heterogeneous with price ranging from over US$ 3.5 per million Btu [British thermal unit] to about US$ 10 per mBtu. It gives conflicting signals to producers who clamor for getting higher price tag to their fields/supplies. It leaves lot of scope for discretion making the system prone to nepotism and corruption and creates uncertainty of the policy environment.
In case of oil, even as the price of domestic crude is linked to its international price, prior to 2016-17, ONGC/OIL were forced to share with downstream oil PSUs viz. IOCL/BPCL/HPCL a portion of the under-recovery the latter incurred on sale of kerosene and LPG at low price. How much the former needed to share, that depended entirely on the discretion of government. Though, the practice was stopped from 2016-17, the Damocles sword looms.
Second, the allocation and distribution of gas is decided by an inter-ministerial committee under the chairmanship of the secretary, ministry of petroleum and natural gas [MPNG]. This prompts consumers viz. fertilizers, power, steel, petrochemicals etc to lobby with bureaucrats for getting a higher share of low priced gas [the internecine war over competing claims has even led to never ending stream of court cases]. Meanwhile, the producers are also left at the mercy of officials who decide all parameters [price included] having a bearing on the returns they get.
These controls with high element of discretion by officials are the biggest hindrance in the way of building domestic exploration and production capabilities.
Third, earlier exploration and production companies faced a stifling regulatory environment. The award of blocks under NELP had to pass through a multi-layered process of approval going up to the Cabinet Committee on Economic Affairs [CCEA]. The execution work from preparation of field development plans [FDP] to production was monitored by a management committee that includes Directorate General of Hydrocarbons [DGH] – the technical arm of MPNG.
Under HELP/OALP [herein, a company bids for blocks on the basis of revenue share it wants to offer for given throughput], the scope for official intervention is significantly reduced. The approval process has been decentralized as files need not go to the CCEA. However, producers are not totally free from arbitrariness and ad hocism. For instance, at higher level of production, disproportionately higher revenue has to be shared with the government.
The government should attend to the above issues on top priority. It should put an end to extant heterogeneous gas pricing by having a single formula-based price bench-marked to 4 global hubs [November 2014 guidelines] which should be uniformly applied to all supplies irrespective of the source. In case of crude, it should categorically commit that ONGC/OIL won’t be asked to share oil subsidy burden. The supply and distribution systems need to be unshackled.