Agenda 2014
Oil & Gas Policy for the Next Government
Most Countries consider economic growth, environmental quality, and energy security as their main component of the sound energy policy. India like any other country has created ‘India Hydrocarbon Vision 2025’ and subsequently followed up with integrated energy policy report 2006. Every budget year and via five year plans, GOI has tried to provide guidance on various Oil & Gas Policies. Even so, in the last decade the Oil & Gas industry has seen a lot of perplex policy decisions. What we intend to do in following exercise is to list out the expectations which we think might give a fresh lease of life in current Oil & Gas Industry.
In line with industry structure, we will segment Oil & Gas in to following broad categories
- Upstream
- Midstream
- Downstream
Upstream – Exploration & Production
During the period 2002-03 to 2010-11, India’s crude oil reserves increased at a CAGR of 0.27% while the natural gas reserves increased at a CAGR of 6.5%. The reserves growth in natural gas was on account of the significant gas discovery made by RIL in the KG-D6 block on the east coast of India. Although definite progress has been made, in terms of addition to reserves and production, when compared with other peer countries, the rate at which reserves and production has grown has raised many concerns.
There has been low and declining interest in NELP bidding and not enough progress has been made for the blocks that have been awarded under different NELP rounds.
Key Issues
- Lack of Fiscal prudence: In many instances, Indian Oil Companies including National Oil companies (NOC) have bid aggressively to win the licence. There have been multiple instances of cost overrun from the original minimum work program submitted.
There has been lot of buzz around Shale gas exploration and its potential, government of India has issued draft shale gas policy in 2012 and ONGC is awarded 1st round of shale gas blocks for exploration. Industry insiders have raised questions on why state oil company is made Guiney-pig for such new initiative.
Expectation
- Adoption of Adjusted concession regime: Boston Consulting group (BCG) carried out study for Ministry of Petroleum and recommended that India should move to adjusted concession regime. Under this regime government share will be based on revenue instead of profit. This will remove lot of administrative hassle and dispute regarding cost recovery. Adoption of new framework should be for all existing PSC contracts. Concurrent system of PSC and adjusted concession regime will only add chaos and confusion to E & P industry.
- Budget approval and budget utilisation per each Minimum work program
- Usage of technical information related to 2D, 3D seismic data for further data mining.
- E-submission of all reporting requirement with fixed due date.
- Inter departmental workflows
Midstream
Midstream sector involves transportation (via pipeline, barge or truck), storage and wholesale marketing of crude or refined petroleum products. Infrastructure is important to balance fluctuations between supply and demand. The country’s pipeline infrastructure spans 19,300 km for crude oil, 16,293 km for gas and 15,903 km for products. However, the pipeline density in the country is still among the lowest in the world with onshore natural gas pipeline density being 3 km per 1,000 km2 of area as compared to 50 km per km2 in the USA, China and the UK. Under-developed pipeline remains one of the most important impediments for effective Gas Utilisation policy. The country has close to 13 major and 176 non-major ports. The total volume of traffic handled by the ports during 2010-11 was 850 million metric tonnes (MMT), out of which major ports handled traffic close to 570 MMT. The petroleum, oil and lubricants (POL) traffic handled during the same period was close to 180 MMT. Current penetration of coastal shipping is concentrated in favour of bulk goods like petroleum and coal.
Increased gas availability, improved gas pipeline coverage and gas being one of the priority sectors are the major drivers of the City Gas Distribution (CGD) business in India. The government has aggressive plans to develop CGD network in more than 200 cities across India. Each city would warrant an investment ranging between 65 million USD to 100 million USD. The first round of bidding is complete and the companies have been authorised by PNGRB. In the second round the bids have been received but authorisation is still awaited. The third (8 cities) and fourth (8 cities) rounds of CGD bidding launched by PNGRB are currently underway.
Key Issues
- Lack of coordination: Existing pipeline developer has installed and proposed to install pipeline based on their marketing plans. Gas allocation made to certain sectors could not even be executed because non availability of the required pipeline structures.
Expectations
- Integrated Oil & Gas Infrastructure development: There is need to have holistic view to how individual cluster of Oil & Gas Infrastructure projects needs to be initiated across India. Gas find in Bombay High enabled to create required infrastructure in Gujarat and Maharashtra. Similar Oil & Gas Infrastructure needs to be designed for the Eastern, Southern and Northern India. This planning requires integrated development of Ports, Storage facility, LNG terminal and refinery needs to be planned minimising last mile rail and road connectivity.
Downstream
India has emerged as a global refining hub on the back of major refining capacity additions involving massive investments. The domestic demand of petroleum products is expected to grow at a CAGR of 7.5% during the next five years. The projected expansion of refinery capacity from 232 MMTPA (4.66 MMbbls per day) in 2012-13 to 311 MMTPA (6.3 MMbbls per day) in 2016-17 is in line with India’s aspiration of becoming a global refining hub. Though the current refining capacity stands at 3.8 MMbbls per day, the throughput in 2011 exceeded 4 MMbbls per day, indicating more than 100% capacity utilisation. India might be Net importer of crude oil however in recent years it has become petroleum exporter. Much of the pain and chaos in downstream sector remains due to subsidy policy adopted by subsequent governments.
Currently government is facing challenge to remove under-recovery and subsidy mainly for Diesel, LPG, and PDS Kerosene.
Key Issues
- Eliminate Notional Subsidy: There has been lot of misrepresentation over subsidy or under recovery on account of diesel. Government and various agencies have maintained that diesel subsidy has caused lot of drain on government fiscal health. However closer look Diesel pricing under-recovery vs. taxed recovered per litre of diesel sold reveals that central and state tax put together are in excess of under recovery. In the event of removal of under recovery and taxation, there will be further downstream impact on states which rely heavily on taxation on diesel sales to fund their state budget.
Expectations
- Rationalisation of Taxation & Adopting correct price determination mechanism: There is argument that under recovery and losses by Oil Marketing companies are not actual financial losses but more of accounting or notional loss. Fuels price formula currently based on trade price parity where 80% weightage is given to import parity price and 20% weightage given to export parity price. It is important to note that India might be importer of crude oil but India is also net exporter of diesel. Using export parity price & reduction in taxes such as Customer duty and special excise duty may reduce under recovery to a larger extent. There is also argument to raise price of diesel by raising taxes to make it equal to petrol, however author of this article feel that this might turn out to be counterproductive. Government of day will always be under pressure not to raise price and taxes and will go back to populism and provide further subsidy. Currently most of the refinery are owned by Oil Marketing companies, in terms of profitability refinery operations are profitable and gross refinery margin (GRM) earned by refinery including public sector are more or less at par with average GRM earned in other refinery across world. Considering most of the under-recoveries have been born by oil marketing companies, it makes sense that either refinery should be part of separate legal entity or along with hydrocarbon retail price build up refinery margin earned should also be disclosed.
References
- BCG Benchmarking report review of upstream commercial structures and insight from global practice
- Natural Gas in India: An Analysis of Policy by Anil Jain and Anupama Sen
- Exploring India, Country Insight by PWC prepared for Petrotech 2012
- Exploring India, Country Insight by pwc prepared for Petrotech 2012
- Gujarat — The Model CGD State: Lessons and Expectations by DJ Pandian, IAS, Principal Secretary, Energy & Petrochemical Department, Government of Gujarat
- Exploring India, Country Insight by pwc prepared for Petrotech 2012
- India’s Fuel Subsidies: Policy recommendation for reform.
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