The year 2012 was a bad one for India?s energy sector. It started with the announcement by Reliance Industries that gas flow from the country’s most prolific KG-D6 block would further fall sharply.
In the subsequent months, the country’s largest coal producer, Coal India (CIL), reported a stagnation in production and a cut in allocation of fuel for power plants.
The story doesn’t end there. The country, then, witnessed one of its worst power failures in history with the tripping of Northern, Central and North Eastern grids. The government?s failure to address the issue of under recoveries of oil marketing companies led Indian Oil Corporation to post one of the highest ever losses by a listed entity, of R22,451 crore.
Though unrelated, these developments point to the severe energy crisis faced by the nation. India imports around 70% of its oil requirements that puts heavy pressure on its finances, especially in volatile global oil market. As per government studies, energy sector in the country needs to grow in double digits to sustain high economic growth.
This is so because India’s manufacturing sector is highly energy dependent. If manufacturing units are not provided fuel, the target of raising the its share in the country’s GDP to 25% from the current 16% would remain a pipe dream.
The previous year was marked by differences between the petroleum ministry and RIL on issues related to restricting cost recovery and falling gas output from the D6 field. There was a change of guard at the oil ministry with Jaipal Reddy being replaced by Veerappa Moily.
The subsidy sharing burden for upstream oil companies, such as ONGC and Oil India, has gone up due to high crude oil price and a weaker rupee.
For example, ONGC?s subsidy sharing burden shot up 39% in the first half of FY13. It paid R24,676 crore toward sharing of subsidy burden during April-September 2012, compared to R17,760 crore in the same period of the previous year. As a result, the upstream major?s net profit declined to R11,974 crore in April-September 2012, from R12,737 crore in the corresponding period of the past year.
During the same period, Oil India?s subsidy burden increased to R4,093 crore from R2,625 crore.
With oil prices staying high and the Central government struggling to maintain fiscal discipline, the new year, too, does not seem to hold relief for these oil producers.
Upstream companies are also battling to keep up production. For example, the total crude oil production in the country during April-October 2012 was 3.7% lower than the target. Not only that, the actual production was 0.7% less than what was reported during the same period last year. During the same period, natural gas production was 12.8% short of the target.
The year 2012 saw a bold move by the government to put an annual cap on subsidised domestic LPG cylinders to six per household. It could get diluted as the government is weighing options following pressure from its allies and others.
At best, the government can raise the cap, but ensure it is a subsidy neutral exercise by raising the price of diesel. Hopes of saving subsidy have been kindled with the proposed launch of direct subsidy transfer to beneficiaries of kerosene and domestic LPG subsidy. Estimates point to a likely annual fuel subsidy saving of R15,000 crore if the scheme works out well.
Government-owned oil marketers suffer because of delayed subsidy payment by way of huge borrowings and the resultant interest burden. On the positive side, the government has come out with a policy for the development of LNG terminals. This is an important move given the continuing stagnation in domestic natural gas production.
In year 2013, sector watchers look for resolution of issues holding up investments in RIL operated KG D6 block, more clarity in the regulatory regime and some gradual increase in domestic natural gas price to encourage production.