Free Pricing: Modi govt fixes gas mess but five years too late!

By: | Published: February 23, 2019 1:48 AM

Amongst other policies that make little sense, when Cairn-Vedanta found more oil, the government extended its lease after forcing it to pay 10 percentage points more of its annual profits to the government; in an oil-starved country, you’d think the government would incentivise Cairn for finding more oil.

Free Pricing: Modi govt fixes gas mess but five years too late! (File photo)Free Pricing: Modi govt fixes gas mess but five years too late! (File photo)

The country’s oilcos should have been happy with this week’s set of reforms that gives ‘full marketing and pricing freedom for crude oil and natural gas’. If their reaction was muted, it is because this freedom, which most thought oilcos had anyway, has only been extended for basins where there is no oil/gas exploration/production today; and while ‘fiscal incentive is also provided’—there is, as yet, no clarity on what these are!—this is for ‘additional’ gas production ‘over and above normal production’…

This is much the same mindless incrementalism that has characterised the government’s oil and gas policy from the day it came to power; if oil imports comprised 23% of India’s imports bill in FY18, doesn’t it make sense to give oilcos the global price for all their output, not just that from areas that are likely to have no oil/gas anyway? Indeed, you will now have fields where there will be different prices paid for gas depending on when the contracts were signed and, as a result, there will be disputes over whether the producer is declaring lower output for one field’s gas and a higher one for another.

Indeed, while oilcos expected Modi to come up with big reforms, given his plan for a 10% cut in import-dependence by 2022, this hope has not just been belied, there have been some big steps backward. Not surprising then, that India’s import-dependence has been rising, and significantly in the case of gas (see graphic).

Modi began on the wrong foot when, despite India importing gas at $12-16 per mmBtu, domestic oilcos were paid just $4.2 and, because the NDA government thought it was designed to help Mukesh Ambani—never mind that ONGC would benefit a lot since it also had large gas assets—it never implemented the UPA’s policy plan to double prices immediately and, over five years, to free them completely. This ensured there was little investment in gas exploration—till the policy was reversed after two years—and explains why gas output continues to fall.

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If the NDA did a quick U-turn on the UPA’s gas policy, it continued with the UPA fiction of allowing oilcos to have ‘pricing’ freedom but not ‘marketing’ freedom. Those not versed in bureaucratese would think they are the same thing—how can you get the best price if you can’t freely market a product?—but they aren’t. Today, oilcos are told how much of their oil they have to sell to which refiner. And since buyers know the oilcos have no other option, including exports, both PSU oilcos like ONGC as well as private ones like Cairn get sub-optimal prices; that, in turn, dampens their enthusiasm for hiking output. And this is when, due to high royalties and other forms of tax, every extra dollar to an oilco means around 50 cents extra to the exchequer; so, the government has ended up hurting itself.

Nothing reflects the government’s attitude better than its treatment of Cairn Energy that, in 2002, bought Shell’s Rajasthan fields for $12 million, drilled 15 dry wells before striking oil in the 16th. After extracting around 460 million barrels already, another one billion can be extracted over the field’s life. All told, Cairn—now owned by Vedanta Limited—produces over a fourth of India’s crude oil and, till date, has given $17.1 billion to the Centre and Rajasthan in taxes/cesses/royalty and another $3.4 billion to ONGC as its share of profits in their JV; that’s 85% of its post-opex/capex revenues. And yet, a $1.6 billion retrospective tax demand was levied by the UPA and, while the NDA didn’t reverse this, it even seized Cairn’s assets to part-pay the tax even as a global arbitration was going on.

Amongst other policies that make little sense, when Cairn-Vedanta found more oil, the government extended its lease after forcing it to pay 10 percentage points more of its annual profits to the government; in an oil-starved country, you’d think the government would incentivise Cairn for finding more oil. Similarly, in 2016, the cess on oil was hiked by as much as 47% and, in 2017, oilcos were asked to pay service tax on ‘cost petroleum’ (that’s the share of oil/gas oilcos get to reimburse them for their costs), ‘cash calls’ (the amount a consortium leader asks others to pay for production costs) and on even the royalty paid to the government! The tax was later dropped.

The government’s behaviour was equally bizarre when, it turned out, Reliance had taken out 0.3 tcf of gas from ONGC’s field that was adjacent to Reliance’s. The world over, such migration of gas—due to interconnected reservoirs—is fixed through joint development of the fields, but ONGC/government asked Reliance to pay `7,000-8,000 crore as the cost of gas; never mind that ONGC would have had to spend a lot more to develop the field to take out the gas; and since there wasn’t enough gas, ONGC would have made losses while doing so. The case dragged on for a few years till, last year, an international arbitration panel ruled in favour of Reliance.

Given this history of incremental policy, deep suspicion of the private sector, frequent policy flip-flops and the introduction of new rules—while their contracts say oilcos will give the government a lower share of profits when they raise investments, a plan was announced to put this in abeyance last year—is it any wonder that neither existing or potential oilcos are convinced the government has a genuine intent to reform the sector?

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