Finally, the Right Energy Sector Policies

V. Rajagopalan

Nov 17, 2014, 05:11 PM | Updated Feb 10, 2016, 05:01 PM IST

During the UPA regime, the role of the petroleum ministry had become one of safeguarding the interests of various private sector energy giants above national interest. Not so any more, under the new government.

Dharmendra Pradhan, the 45-year-old low-key minister of state with independent charge for petroleum is fast turning out to be one of Prime Minister Narendra Modi’s more effective reformist lieutenants in the government.

While key decisions such as the deregulation of diesel prices and the process of progressive dismantling of other fuel subsidies has been credited to Modi and the fortuitous fall in global energy prices, the role of Pradhan, a relative political lightweight from Odisha, in steering the country’s energy policy in the vicinity of sanity, has gone unnoticed.

He seems to have been a beneficiary of Modi’s governance mantra of ministerial freedom with accountability. During the 10-year UPA regime, the role of the petroleum ministry had become one of safeguarding the interests of various private sector energy giants above national interest. Shastri Bhawan had become the chief playground for lobbying and counter lobbying by four large domestic and transnational energy giants.

State-owned giants such as ONGC were victims of government apathy. The UPA viewed them as nothing more than dividend-yielding cash cows. ONGC was an investor’s darling when it went public in 2003-2004 under the chairmanship of Subir Raha, raising close to $500 million in the primary market. More than adverse market conditions, it was ONGC’s poor financial condition which prevented the UPA from further divestment of stake in the company, especially when it was in dire need of cash.

All that could change, and national interest make a comeback as the fulcrum of India’s energy policy as Pradhan tries to make a clean break from the past.

For a start, under Modi’s watchful eyes, the oil ministry is working hard to ensure that India’s interests in various corners of the world are well protected.

In a meeting with Foreign Minister Sushma Swaraj, Pradhan pushed for a stronger diplomatic corps that was clued into the global energy game and the financial forces at play.

India’s State-owned energy firms have hitherto been on their own with little diplomatic heft behind them when they ventured overseas. They were reliant on international ‘business consultants rather than the arms of the Indian government. The lament of firms such as ONGC Videsh (OVL) has been than India’s diplomats weren’t best suited to navigate the technical and financial complexities of acquiring oil and gas assets overseas. When for instance pitted against Chinese companies with the full might of the State behind them, they stood no chance.

Also, Indian energy companies constantly find themselves in a soup in places such as Iran, Iraq, Russia, Venezuela and Mozambique.

Take the example of Iran where Indian firms find themselves in a no-win situation.

As it is, the Iranians are tough to deal with and are known to be whimsical and hard bargainers. What’s more, Indian firms doing business in the country now face stiff US sanctions. The Government Accountability Office (GAO) of the US has declared OVL as “commercially active” in the Iranian energy sector. After much legal wrangling, OVL has escaped the GAO net.  But OVL’s parent ONGC hasn’t been spared. There are severe restrictions on ONGC from doing business in the US.

The issue was raised during the last US-India Energy Dialogue but the Americans did not relent, and ONGC was merely advised to engaged with GAO as per process and seek withdrawal of its name from the “active” category. This, while Chinese national oil companies active in countries that attract similar penalties have managed to evade sanctions thanks to deft diplomacy. The MEA will now actively lobby on behalf of Indian firms.

There are further complications in Iran which require intervention from the very top.

The previous Iranian government under Mehmood Ahmedinejad was willing to enter into production sharing contracts (PSC) with Indian firms to operate in the country’s lucrative Farzad B gas field which bears an estimated 21.68 trillion cubic feet (tcf) of gas reserves.

Now the new dispensation is agreeable only to a service contract that does not offer any share to India from the gas produced.

India`s crude imports from Iran have nearly halved to 10.5 MMT in 2013-14 since 2010 which has considerably whittled India`s capacity to work in Iran unless a PSC regime is in place.

Also, under the US sanctions a company can invest a maximum of $20 million per year in projects in Iran. There is also a risk that such companies investing in Iran would be barred from investment in other major markets, especially in North America, as ONGC has found out.

Pradhan now wants the MEA to play an active role in trying to sort out the tangle over the Farzad B gas field as OVL has invested both time and money in establishing significant reserves in the field.

Even India’s supposed friends have treated Indian energy firms with scant respect. Venezuela owes them nearly $400 million in dividend payouts from the San Cristobal project in which OVL has a 40 per cent stake.

The increased attention on the financial well-being of State-owned oil firms is also because Modi has mandated Pradhan to ensure higher domestic oil and gas production. Pradhan has set up a mechanism for regular review of imports and take appropriate measures to ensure that imports are rationalized, and that the trade deficit is not allowed to skyrocket.  Based on the appraisals submitted by the ministry, the commerce ministry will present a quarterly update to the PMO. According to sources, the PM is of the firm belief that poor quality petroleum product imports can be substantially reduced if the PSUs get their act together.

All departments and ministries have been asked to review imports of products falling under their jurisdiction with the objective of rationalizing inessential imports and strengthening domestic capacities.  In accordance with PMO instructions, a joint secretary in the petroleum ministry has been appointed as the nodal officer in-charge of international trade to facilitate this process.

(Views expressed are personal)

The author has spent more than three decades working in the energy industry across the world.

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