New oil and gas can come only at market prices; the alternative is high-cost imports
Atul Chandra
India is home to more than one-sixth of the globe?s population that is aspiring for an economic growth of at least 8%. That is certainly going to demand twice its current consumption of oil and gas by the end of the decade. Not just economic growth but the very political and social stability of the country becomes contingent upon ensuring those supplies in an uninterrupted manner. Over the course of the 12th Five Year Plan itself India?s demand of crude oil would be of the order of 205 Mtoe and 80% of this would have to be imported. The country would simultaneously need 373 mmscmd of natural gas, of which, at current declining production levels, 60% would have to come from outside. With these mind-boggling quantities needing to be imported, what is the excuse or logic for not freeing up prices to make them market-driven?
Indian sedimentary basins are still very much under-explored. With vast unexplored resources in deep waters, Indian basins are highly complex, needing large capital investments and technology inputs. A recent analysis of the 12 major basins of India shows the potential for a further 64 Tcf of risked recoverable resources are yet to be found (YTF). However, due to the inherent high risk nature and high cost of complex basins, very few are likely to be developed at a price of $8/mmbtu. A price of $10/mmbtu and above is required to develop most of the deepwater and technically challenging discoveries. Highly challenging plays and shale gas require a price of $12-$15/mmbtu to encourage exploration and fully exploit potential. In sum, very little new oil or gas will come from these basins unless it gets market prices. The alternative is to import it at higher prices and in dollar prices that we can ill-afford, and lose out on all spin-off benefits as well.
According to IEA World Energy Outlook 2012, India needs an investment of $376 billion till 2035 to exploit domestically available resources. With a high fiscal deficit of more than $100 billion (5.9% of GDP) and with investments required in other infrastructure it will be impossible for the government to invest this amount. It is no-brainer that companies need to be incentivised to invest in India rather than opt to invest overseas to sell into the Indian market.
International companies possessing the technology and resources for these kind of high-tech operations have more or less stayed away from investing in India. Only 8 of 37 companies that bid in the last round of auctions were foreign companies, down from 21 in 2008. This is both due to perceptions of difficult prospectivity under the ground as well as the above ground factors linked to the regulatory environment. Prospectivity will enhance automatically should there be a string of successes with companies striking oil and gas in these basins. The above ground factors, however, can only improve provided there is a return to some basics of the economics of oil and gas investments.
It is precisely these basics that the current contract terms had been framed upon. In order to compete for international capital, capability and technology, policymakers in the 1990s had realised that conditions for investment need to be competitively conducive. All currently signed PSCs under NELP, framed at that time, clearly state that all production would fetch the ?market price?. Somewhere along the way lack of reforms in consuming sectors like power and fertiliser derailed implementation of these terms, leading to deviations from the contractual terms as well as the terms of offer. Prices, instead of being market-driven, are being administered by the government. The truth is that demands to control gas prices in order to keep prices of power and fertiliser low are self-defeating?they only result in curtailing domestic production leading, in turn, to ever higher imports at far higher prices.
Simultaneously, bureaucratic delays have amplified political risk proving a major deterrent to FDI. Terms of contracts entered into after international competitive bidding cannot be left to the whims of individuals. As we again try to kick-start the process of reform today and undertake road-shows abroad, let us not forget promises already made to international investors earlier.
While domestically produced is allowed market-driven prices, natural gas is currently sold at regulated prices under a gas utilisation policy whereby the allocation of gas to different consumers is controlled by the government. Artificial controls on pricing and distribution will only encourage Indian companies, including PSUs, to invest in overseas E&P activities, developing economies abroad. Meanwhile, the country depletes precious forex reserves, loses out on royalties/taxes, and fails to provide employment and growth in the domestic economy. Market-driven prices spur investments, increase energy efficiency by reducing wasteful consumption, and reduce import dependence as well as subsidy outgo.
The kind of upstream contractual regime followed by the country is a key factor in determining its attractiveness. At present, India allows 100% foreign direct investment (FDI) in exploration and production of oil and gas through a production sharing regime (PSC), wherein the companies get to recover all their investment before sharing profits with the government. This policy initiative has led to discoveries, among which KG-D6 (Reliance Industries) and Barmer (Cairn India) being the major ones. Minor tweaking to further increase acceptability would be a better option than changing the form of contract entirely. This will only sow more seeds of uncertainty and doubt in the minds of potential investors.
Market prices for natural gas as well as oil are unavoidable for India; the choice is between imports (higher cost and current account deficit) versus domestic production which could bring additional government revenues, higher supply security and reduced balance of payments, at lower cost. The choice is clear and needs to be made quickly. To administer the bitter pill at the earliest is better than to let the situation snowball into one which requires painful surgery later.
Atul Chandra has served the E&P industry for over 46 years, both in India and abroad, in private and public sectors. He was managing director of ONGC Videsh Ltd
