Market-pricing has to be an integral part of this
The petroleum ministry’s proposal, reported in FE on Monday, to do a major overhaul of how exploration and production (E&P) licences are granted, is a major step forward. Given how most of the disputes with the government centre around the amount of money spent on exploration, moving to a revenue-sharing formula should have been done a long time ago. Apart from the fight over whether Reliance Industries Limited (RIL) gold-plated its investment in the KG Basin, even the disputes over the ‘drill stem test’ are related to costs. A total of 14 discoveries of gas by both ONGC and RIL —these have around 3.6 trillion cubic feet of gas—are also held up due to this. The Cabinet has now told the operators that they can either conduct the ‘drill stem test’ that the Directorate General of Hydrocarbons wants to convince itself the expenditure is worth it, or simply carry on with their exploration efforts, but at their own costs—which means that if oil/gas is not found eventually, the firms will not have their costs reimbursed. Once there is a revenue-share, all these problems go away since the government will not have to bear any costs—in the event, no oil firm’s exploration plans will be challenged since it will be bearing all the risk.
What is even more interesting is that the government will no longer give a licence for a particular type of hydrocarbon—oil, gas, coal-bed methane. Developers will be free to drill for anything. And given data on various blocks will be available from the National Data Repository, the government will no longer be demarcating the blocks being put up for bids. Instead, firms will now be allowed to approach the government and ask for particular fields based on their reading of what the seismic and other studies in the NDR show.
That said, the government will still need to work on a few other areas. For one, since $22 billion has already been invested in E&P so far, it is important to ensure existing disputes are resolved at the earliest—this would mean giving more powers of approval to the management committee of explorers in each field, as well as proceeding with arbitration in several cases. Two, it is important to, instead of issuing leases for a fixed period of time, link the lease to the economic life of a field. Three, and most important, investors need to get more confidence in the pricing structure. While the current production sharing contracts also talk of free-market pricing, the gas pricing fight shows the government is not ready for this as yet—sooner, rather than later, the government needs to agree to market-pricing of all fuels at the producer-end at least.