Fuelling the oil and gas sector

Written by Ashu Sagar | Updated: Oct 2 2013, 03:36am hrs
The period between 2009 and 2013 saw the nadir of Indian upstream activity. In 2009, production started at two of the largest discoveries in IndiaKG-D6 and Mangala. Everyone had predicted the sunrise of Indian gas and oil, with gas production doubling and the new oil from Rajasthan. More than 200 Production Sharing Contracts (PSCs) had been signed and were being implemented. Oil prices were reasonable. International companies had started looking at Indian upstream with interest. Even the petroleum ministry wanted to be involved in the contract management as it was uncomfortable with the idea of such momentous changes occurring without its guidance.

But soon, the slump came. It was around this time that various scams started surfacing.

The scam-plagued government shied away from defending even those terms of the contracts (PSCs) that it had signed through a transparent bidding process. The CAG rode roughshod over a

weak-kneed bureaucracy managing PSCs. The junior officers implementing PSCs could not find any senior to support and defend their legitimate decisions. Decision-making had stalled.

Decisions that could have led to increased exploration and production, new discoveries or continuation of production in the existing areas were waylaid on frivolous pretexts. 'Zero decision', or not taking one, became the safest bet.

Even the obvious decisions like more exploration in the existing producing fields took years to be cleared. Worse, officials added additional punitive conditions beyond the contract requirementsjust to be doubly safe. Discoveries, development plans and declarations of commerciality for gas, etc, were not cleared under rather simplistic fig leafs like gas development at a (artificial) price of $4.2/mmBtu. This happened even as the country imported LNG at over $10/ mmBtu. The industry had come to a standstill. The final result is that only a handful of the 200+ PSCs signed are in operation today. The sad fact is that all this happened in a country that is energy deficit and forex constrained. The situation was exacerbated by factors that were within the control of the administration.

The AOGO-A T Kearney Index of the Attractiveness of India as a Global Upstream Destination slipped. With a possible score of 5, (Minimum 1, maximum 5, average 3), India made it to 2.7 last year. This was despite boasting of the best PSC terms, most transparent bidding system, level playing field, tax benefits, etc.

The number of bids per block was propped up only by S (small) blocks, where new domestic entrants could take the entry risk. In significant horizons often it was only the PSUs that kept the bid-box open.

The withdrawal of private sector defeated one of the prime objectives of the NELP, viz. attracting increasing exploration risk capital from private investors. Meanwhile, friendlier new provinces in East Africa and the Mediterranean opened up to explorers.

Why did the shine rub off so fast

A well-crafted contract with a reasonable flexibility for companies to work independently had been usurped by the bureaucracy. In the process, the contract lost the objective of enhancing energy security of the country. Administrators forgot that the contract was designed as a win-win or lose-lose preposition and could not be administered as a win-lose exercise. In this case the regulator wanted to be administrator as well! Quick successive discoveries also gave rise to the fear of loss of crown jewels. Just when the industry should have expanded, given the robust international market, it contracted. The CAG did the rest. Thus, the best allocation and management systems got sabotaged.

The fall arrested

With a stalemate in all quarters, the government set up the Rangarajan Committee to break the logjam. Rangarajan identified the ills but his prescriptions were economically compromised to make them bureaucratically and politically acceptable. His suggestionsremove financial issues from the model, or since gas price calculated under PSC shall mean a higher fertiliser subsidy, increase it only halfway, etcstand as evidence. He was hampered, no doubt, by the quality of data provided. But, the negative impact of the inappropriate model for Indian geology, or the continuation of uncertainty over gas prices remained unaddressed by the committee.

The increasing CAD, the rupee's downward spiral, increasing energy imports ultimately forced the government to attempt a more holistic view. Economist Vijay Kelkar has now been entrusted with coming up with a long-term vision for the Indian upstream sector.

In the last few months, the industry has seen a number of measures to reduce the backlog. These include holding MC meetings, confirming minutes of meetings and even routhine things like the appointments of auditors. The industry now sees a genuine effort by the petroleum ministry to generate a faster response. These decisions would be unremarkable in a normal environment. However, for an industry that has been struggling to breathe, these are a whiff of fresh air. Even the half-hearted change of gas price determination using RR formulation (which is still inadequate) is being accepted as a first step and a move in the direction of basing it on formula pricing.

The department secretary or the minister admitting that the system is process-driven and not focussed on results and press releases owning up to the backlog offer hopeafter all, acknowledgement of problems has to be the first step for any course correction!

The way forward

What the government needs to do is, first, set a clear mission, objective and policy. The commitment to implement should be, and be seen to be, absolute. Like defence and foreign affairs, energy security should be made a national priority and kept above petty politics of the day. The Cabinet also needs to endorse all honest decisions taken towards fulfilling the policy objectives and ensure that these shall be supported and defended at the senior-most level. Such assurances need to be written, as the normal systems and verbal assurances have lost their credibility.

The government also needs to separate its sovereign function from its regulatory and administrative ones. The regulator should guard the national assets. The contract administrator 's mission should be to get the contract implemented in time and facilitate maximisation of exploration and production. Both these jobs dont belong to the policy maker. The demand by the industry for an empowered upstream regulator has been ignored for over the last fifteen years. The paralysis of the last few years shows how detrimental this omission has been.

With regulating functions isolated, the administrators of contract (the government) and the executors of the contract (the operators) have to be on the same page. If there is an alignment in vision there is no reason that they should not be able to brainstorm together to find the best ways forward.

The author is the secretary general, Association of Oil an Gas Operators (AOGO)