1. Big bang decisions today: With higher pricing power, gas output to look up again

Big bang decisions today: With higher pricing power, gas output to look up again

The Cabinet Committee on Economic Affairs (CCEA) will likely decide on a clutch of reform proposals aimed at giving the much-needed impetus to the country’s under-performing upstream hydrocarbon sector on Thursday.

By: | New Delhi | Updated: March 10, 2016 10:14 AM
Along with these incentives for investors, the revenue-sharing regime where the government's remuneration over the life cycle of an asset is directly linked to the output levels and price could also be brought in. (Reuters)

Along with these incentives for investors, the revenue-sharing regime where the government’s remuneration over the life cycle of an asset is directly linked to the output levels and price could also be brought in. (Reuters)

The Cabinet Committee on Economic Affairs (CCEA) will likely decide on a clutch of reform proposals aimed at giving the much-needed impetus to the country’s under-performing upstream hydrocarbon sector on Thursday. Topping the CCEA agenda will be the Budget proposal to accord gradual marketing freedom and higher pricing power to producers of natural gas from unexploited difficult areas, but the committee might also usher in single-licence system for all forms of hydrocarbons.

Along with these incentives for investors, the revenue-sharing regime where the government’s remuneration over the life cycle of an asset is directly linked to the output levels and price could also be brought in.

With the petroleum ministry and North Block having deliberated on the Budget proposal, it is likely that not only state-run ONGC’s KG-D5 asset, where exploitation is yet to commence, but the unexploited segments of the Reliance Industries’ KG D6 block (only D1 and D3 blocks are currently producing), could get the proposed calibrated marketing freedom.

The proposed changes would also benefit Cairn India, BP, Essar Oil and GSPC, other players in the country’s hydrocarbon sector and future investors.

Once the uniform licence is launched, drilling of all forms of hydrocarbons — from oil to shale gas — could be done under a single contract, a move that would improve the ease of doing business.

Sources told FE that the petroleum ministry would place before the CCEA nearly five issues that are “expected to completely change the scenario of the oil and gas industry.” These policy changes, they said, were aimed at attracting investments into the sector and reduce India’s costly reliance on imported crude oil and natural gas.

In his Budget speech, finance minister Arun Jaitley proposed to “incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of higher cost and higher risks.” The exploration companies are eagerly waiting for the promised “calibrated marketing freedom” and a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels, as announced by Jaitley.

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The government is also likely to offer clarity on the ‘premium gas pricing’ announced in October 2014. It is understood that Jaitley and petroleum minister Dharmendra Pradhan had detailed discussions on the reform agenda.

The petroleum ministry had proposed that firms be allowed to sell up to half the output from difficult and challenging fields at market rates. But North Block was not agreeable to the proposal, leading to delay in its implementation. The Finance ministry had given many reasons for its stance: Absence of sufficient competition among gas producers, tepid demand, the impracticality of freeing input (gas) price when output prices (power and fertiliser) are not market-determined, potential grave implications for the exchequer (as higher gas price could inflate power and fertiliser subsidies) and, finally, its assumption that a higher price might not result in a surge in investments by gas producers at this juncture. The petroleum ministry had said that difficult areas be categorised into five groups and market-determined pricing for 20-50% of these fields’ output; the more difficult a field, the larger.

In the revenue-sharing regime, the bidders will have to indicate the quantity of oil and gas they will share with the government at various stages of production along with the rates. So, the government’s remuneration is delinked from the quantum of investment made in developing the block and extracting the hydrocarbons. Under the present production-sharing contract (PSC) system, applicable for blocks auctioned under all the previous Nelp rounds, an explorer gets to recover costs incurred during the exploration cycle, before sharing profits with the government.

It may be noted that as a precursor to making them the norm for future bidding and contracts, the government had in September last year introduced the revenue-sharing and unform licensing models for 69 marginal fields being put under the hammer. The developers of these fields will also benefit from ‘market-determined prices” sans any government interference. Moreover, the bidders for marginal fields are given the right to sell gas to customers of their choice, unencumbered by the government’s allocation policy.

Meanwhile, the CCEA is also expected to decide whether ONGC or Essar Oil would be offered the Ratna and R-Series fields, 130 km south-west of Mumbai. PSU giant ONGC had found and developed these fields but in 1996 government auctioned the asset to Ruias-promoted Essar Oil. Interestingly, although 20-years have gone by, the production sharing contract has not been signed because of bureaucratic red tape.

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    John
    Mar 10, 2016 at 4:34 am
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