Dear Mr Finance Minister,
The budget is no longer a sack of goodies, with sops being doled out to different constituencies, as was the case in India’s socialist past. Rather, it is an affirmation of the directions that the government of the day seeks to give to policies in different sectors. It is, therefore, an appropriate moment to present a wish-list of actions sought from the government to remove the paralysis in the domestic oil & gas exploration sector, so that it becomes a productive partner in the Indian growth story.
First, the government must shed its paranoia about the private sector that has vitiated almost every decision in the past few years—what can be termed an “East India Company” mentality. Oil & gas production by the Indian public sector companies has been stagnant over the past 25 years: increases in production levels have been due to private sector production. All major discoveries of the past two decades have been by the private sector companies, vindicating the policies adopted by the then central governments. Despite this, it is unfortunate that the new government continues to believe in a command-economy approach, as evidenced by the draft revenue-sharing contract (RSC) currently under consideration.
Second, throwing the baby out with the bathwater is certainly not sound public policy. The current petroleum exploration fiscal regime, although styled as a production-sharing contract (PSC) system, is essentially a royalty-cum-tax system, with the state taking its share through upfront royalty payments, profit petroleum and income tax. Such a system can be prone to “gold-plating” of expenditures, especially when cost-recovery is the first charge on revenues, with adverse implications for the share accruing to government. But then, this is a problem endemic to any taxation system. The income tax department is no stranger to controversies on transfer pricing, under-invoicing and payments to affiliates. The answer lies not in removing cost as a factor in the government share calculations, but in greater competence in assessing the work programmes of companies and the reasonableness of expenditures. Changing the entire fiscal system will not only affect private investor sentiment, it is also a regressive step in a worldwide scenario—over 90% of the countries follow some variant of a profits-based mechanism to extract economic rent from petroleum production. India, with its perceived moderate hydrocarbon prospectivity, is no Saudi Arabia or Venezuela to be able to dictate terms to private investors.
The third issue is poor regulation of exploration and production activities, accompanied by ill-informed interference by the government in day-to-day decision-making processes. The Directorate General of Hydrocarbons (DGH) has not developed the competence to take sensible decisions on contractual issues. It has also been constrained by the allegations of mala fide that flow thick and fast whenever any decision is seen as favourable to the private explorer, even though it may be the most logical decision in that context. The outcome has been interminable delays in approval of work programmes and expenditures, affecting both production and revenue flows. Even permissions for exploration activities in production areas to enhance petroleum production have been delayed or refused; one casualty of this approach has been the development of the Cambay basin in offshore Gujarat. There is apprehension whether Cairn India will get the nod for extension of the contract period beyond 2020, when the present contract period expires, to augment production from the Rajasthan block. Refusal of extension to India’s most successful private producer to date will severely dampen investor enthusiasm and cast a question mark on the government’s sincerity and commitment to enhance domestic oil & gas production.
Finally, there is the question of contractual sanctity. Any modern society with a healthy economic system flourishes only when contracts are enforced in letter and spirit. The success of the government in compelling Vedanta to agree to pay royalty (in violation of specific contractual provisions exempting royalty payments) may have secured it short-term revenues but has lost it a lot of credibility with the international petroleum sector. The tendency of public interest groups to rush to the courts for redressal of perceived contractual violations by the private operator have affected the resolution of issues through conciliation and arbitration mechanisms. The latest indicator of government’s lack of enthusiasm for contractual sanctity is the removal of the provision for fiscal stability in the RSC. This provision, which has featured in PSCs in India for well over 25 years, protected companies from arbitrary increases in taxes and duties by governments. Absence of such a provision in the future contracts, coupled with the government’s recent track record on contractual sanctity, will severely dampen investor interest in future bidding rounds.
The wish-list for the petroleum, therefore, features (a) the winding up of the present discussions on changing contract systems and continue with the tried and tested PSC system; (b) developing a strong and competent DGH which commands confidence from both the government and private investors; (c) as a corollary, limiting the role of the petroleum ministry to purely policy-making, with no role in deciding contractual issues; and (d) strictly honouring contractual provisions and taking recourse in contractually-provided methods for dispute resolution. The response of the government to policy in this critical sector will have a cascading impact on many other sectors even as private investors wait to see if the government “walks the talk”. Else, as George Santayana gloomily prophesied, “Those who cannot remember the past are condemned to repeat it”.
Very sincerely yours, A concerned citizen
By V Ramani
The author, a retired IAS officer, comments on public affairs and policy
