Despite the fact that its production sharing contract (PSC) allows it freedom to market crude oil, Cairn is forced to sell its product at a 10-20% discount to PSUs and private refining firms.
The government has done well to launch an open acreage licensing policy (OALP) which allows oilcos to bid for acreage that they feel has oil/gas potential rather than wait for the government auction—once they evince interest, the field will be opened up for bidding. Since existing oilcos have a pretty good idea of what areas have better potential, OALP will help better India’s energy prospects. The lack of clarity on many policy issues, however, is best exemplified by the fact that India’s most successful private sector oil producer—Cairn India has invested $8 billion already to produce 800 million barrels of oil till date—is fighting the government in court on a variety of issues ranging from a patently unfair tax suit to not getting an extension for its oil block in Rajasthan. And despite the fact that its production sharing contract (PSC) allows it freedom to market crude oil, Cairn is forced to sell its product at a 10-20% discount to PSUs and private refining firms.
While it is well known that Cairn discovered oil in its Rajasthan block in 1999—it bought the field from Shell which thought it was a dud field—the company felt it had a lot more potential and sought permission to continue drilling even after the first seven years of the PSC were over; by law, exploration is not allowed after that. Cairn got permission, as a result of which its ‘gross proved and probable hydrocarbons initially in place’ have risen from 5.2 billion barrels of oil equivalent in 2009 to 7.8 billion today—since it cannot extract the extra oil in its original 25-year PSC, it sought an extension. Logically, since 70-75% of oil revenues anyway go back to the government by way of cesses, profit-petroleum and profit-share for ONGC, you’d think the government would give the clearances quickly—unless this is given, how is a board to approve a capex plan for further exploration and development? This has not been given for several years now, though there is talk the government may hike the profit-petroleum—by how much, though, is not clear. It’s interesting to note that while the government is planning to hike the profit-share, the UK cut its petroleum-revenue-tax last year—effectively reversing changes introduced in 2011—in an attempt to boost the investment climate; at 63%, the UK’s tax on oil revenues is lower than India’s 70%.
In the case of Reliance Industries Limited, the most successful private firm in the gas segment, apart from the case it is fighting with the government on its costs being excessive, it is in court asking for freedom to price the gas it produces—according to the PSC, though, full marketing freedom is allowed. Unless the government is, through its actions, able to convince would-be investors of its bona fides, it is difficult to see why there would be a surge in investments—while overall investments are down a third over the past seven years, those by the private sector are down to a twelfth.