Hiking gas price will be a pressure test for BJP govt

May 19 2014, 12:48 IST
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Oil ministry is to yet to decide if it wants to go ahead with cost recovery or the revenue-sharing model for oil and gas contracts. Oil ministry is to yet to decide if it wants to go ahead with cost recovery or the revenue-sharing model for oil and gas contracts.
SummaryNarendra Modi govt is widely expected to take steps to boost investor confidence in oil & gas sector.

The Narendra Modi government is widely expected to take steps to boost investor confidence in the oil and gas sector. What needs to be seen is how the new government tackles the controversial issue of revising domestic natural gas prices.

The UPA government failed to implement the new pricing regime based on Rangarajan formula as the Election Commission played spoilsport. Had the decision been implemented, the gas price would have nearly doubled from $4.2 per mBtu now to $8.4/mmBtu.

The petroleum ministry is to yet to decide if it wants to go ahead with cost recovery or the revenue-sharing model for oil and gas contracts. A committee headed by C Rangarajan had proposed that the fiscal system of production sharing based on cost recovery should be replaced by revenue sharing model. But, another committee headed by the Vijay Kelkar committee suggested the continuance of the present regime of allowing oil and gas producers to recover costs before paying the government its share.

The bureaucrats had drawn a blueprint to accelerate oil and gas exploration in the country. This was meant to attract global energy majors to find and produce oil and gas in India. This is likely to be one of the key issues to be taken up by the Modi government, which is expected to take charge this week.

“It has been observed that there is lack of flexibility in several timelines prescribed in the production sharing contract (PSC) regime. Such rigidity in the PSC provisions is jeopardizing the objectives of E&P, and thereby undermining the energy security of the country,” a senior petroleum ministry official told FE.

Soon after the new petroleum minister takes charge, the ministry hopes to approach the Cabinet Committee on Economic Affairs (CCEA) to relax operational parameters for exploration and production (E&P) activities. This has become important because India's crude import bill has sky rocketed from $112.1 billion in FY11 to $ 155.7 billion in FY14. On the other hand, production of oil and gas from domestic fields is rather stagnant.

The proposals include extension of time for submission of declaration of commerciality (DoC), field development plans (FDP), reduction in minimum work programme and swapping of 2D and 3D seismic work. The ministry has identified four key issues hampering growth of the sector. These are perception of poor geological prospectivity, data availability, contract regime and fiscal stability.

“The absence of operational flexibility in essentially uncertain commercial ventures such as E&P contracts is counterproductive and is undermining the fundamental objective of expediting E&P activities in the country,” the official added.

For instance, due to various operational reasons, proposals have been received from contractors for extension of DoC submission period. However, in the absence of any provision in the PSC for extension of the timelines, the DoC submitted beyond timelines is not accepted resulting in non-monetisation of the hydrocarbon discovery. Similarly, there are no provision for extension of time for submission of FDP.

Moreover, the companies that have bagged oil and gas blocks under auction, face roadblocks when government agencies such as ministry of defence, department of space or state administration deny permission to carry out exploration activities in the entire block or part of it. Here, too, there exists no provision to reduce the minimum work programme (MWP) if a part or whole block is not made available for exploration activities.

India has total reserves (proved & indicated) of 760 million metric tonnes of crude and 1,330 billion cubic metres of natural gas, shows the government data. Another task before the government is to come up with a framework for extension of the production sharing contracts for Panna-Mukta and Tapti (PMT) and Ravva fields are going to expire in the next few years.

BG-ONGC-Reliance Industries, joint venture partners in the Panna-Mukta and Tapti (PMT) fields, have already indicated to the government about their intent to seek extension, which expires in 2019. The asset in the west coast accounts for nearly 6.5% of the country’s domestic oil and gas output. Another similar contract that will have to go in for extension is Cairn India-operated Ravva fields in the east coast.

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