The government, it has to be said, has come a long way since last year, when exploration had ground to a halt due to unremunerative prices of natural gas and the industry facing all manner of tax and other issues, including non-renewal of mining licenses—see graphic on declining private sector investments. Today, with RIL-BP having announced a $6 bn investment in the KG Basin, things look quite different.
This optimism was reflected in the meeting prime minister Modi had with various global oil and gas companies this week, and some like Saudi Aramco have already talked of large investments after the meeting; Russia’s Rosneft, similarly, has just sealed a $12.9 bn acquisition of Essar Oil. While both these are in the refining/marketing space where India is an attractive market—from 4.5mn bpd today, oil demand will rise to 7.5 mn bpd by 2030 and gas from 56bcm to 100bcm—the real issue is whether there will be enough investment in exploration where Modi’s target is reducing India’s import-intensity by 10% over the next five years.
Most oil CEOs agree the government is a lot more responsive today, best brought out by petroleum minister Dharmendra Pradhan’s statement at the meeting that India would be setting up a gas trading platform soon. From a time when, for years, government would not even raise gas prices despite the production sharing contracts—legally binding documents, it must be stresse—clearly saying the companies had full pricing and marketing freedom, Pradhan is promising a vibrant gas market as in the US or other developed countries.
But, given the government’s—and not just the NDA but previous ones as well—history of not honouring contracts and wanting to control prices of even medical stents, private sector oil majors will need some more convincing, perhaps in the form of clear timelines. If, for instance, gas prices for a deep-water developer like RIL-BP are capped at $6.3 per mmBtu, does this mean the cap becomes redundant and RIL-BP can charge free-market prices? And what happens to ONGC’s older blocks where the price is even lower? Logically, the government will have a graded structure—10% of the output, say, can be freely priced in Year 1, 20% the year after … Similarly, given the importance of fertiliser and electricity, how soon or over what time-frame will producers be free to sell to the highest bidder—will the government allow gas producers to not sell to fertiliser units if they get better prices elsewhere?
Even more important is the transportation of this gas. Right now, the public sector GAIL both sells gas as well as operates the pipelines this moves through. If a vibrant gas market is to be developed, and that is the only way large enough investments from the private sector can be expected, genuine separation of carriage and content is needed. In the electricity sector, keep in mind, this separation is part of the law, but no one has been able to enforce ‘open access’—the technical term for it— in any meaningful manner for one reason or another and the government hasn’t stepped in to fix this.
It gets worse in the case of crude oil where private producers do actually get market-determined prices. But in the case of Cairn which produces a superior quality crude and wanted to be able to export it to get a better price, the government has not allowed this and forces it to sell to PSUs and private refiners like Reliance and Essar at the price of inferior crude produced by ONGC and others. And when Cairn found more oil reserves and wanted to extend its mining lease, the government took years to okay this, and when it did, instead of being grateful for the extra production, it asked Cairn to pay a revenue share of 10 percentage points more than it did earlier! And that is when the share the government takes is, in any case, on the high side (see graphic). Indeed, while the government kept hiking the fixed cess it charged on oil output—it rose to $9 per barrel when oil was at $100 and remained at that even when oil fell to $28—when it moved to ad valorem rates in the last budget, the rate was fixed at 20% to ensure the industry still paid $9 per barrel!
And, apart from the unfair tax case against Cairn Energy which originally discovered/developed the Rajasthan fields that provide a fourth of India’s total output, the industry has several other tax issues. Not being under GST is a big dampener—if, say, $15 bn is invested in the deep waters to find gas, the tax component of this will be $2 bn, and this will be a dead loss if the sector is not brought under GST. Amazingly, the sector has to pay service tax on the royalty it pays the government and also on ‘cash-calls’. If Cairn and ONGC are equal partners in a block—but the operator is Cairn—and Cairn tells ONGC it needs to pay $100 mn as its share of the costs incurred, the taxman is asking for service tax on the $100 mn! After this caused a furore, the tax notices were put on hold, but not scrapped.
Given ONGC’s poor production, forcing it to get private partners—for a profit share—will also help attract big oilcos. The larger lesson, though, is that while the policy environment has got better, the government will have to do a lot more to attract private investment—that means convincing them it won’t renege on commitments, which is not easy given India’s history.