Reducing import dependency: PM Modi wants more oil, govt doesn’t play ball

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Updated: January 8, 2020 9:30:55 AM

When Modi took over, though gas was imported at $12-13 per mmBtu, he refused to implement the UPA proposal to double prices for domestic gas to $8.4 since he believed this was a UPA scam, to primarily benefit Mukesh Ambani even though ONGC would also benefit enormously.

Reduce, import dependency, import, export, PM Modi, oil, narendra modi, ONGC, donald trump Fresh investment dried up and Modi was forced to raise prices after two years.

Though crude oil prices fell a third since Narendra Modi came to power in 2014, import volumes rose a fourth and ensured that India’s import bill fell by just a sixth. So even though the oil price spike has been temporarily halted—after US defence secretary contradicted president Trump’s threat of targeting 52 Iranian cultural sites—India’s oil balances could start going out of whack if the price exceeds $75-80. This is because, while Modi wanted India to reduce its import-dependence from 77% in FY14 to 67% in FY22 and to 50% by 2030, this has instead shot up (see graphic) thanks to unfriendly government policy, including stripping ONGC of its cash and the various hobbles on its operations due to it being a PSU.

When Modi took over, though gas was imported at $12-13 per mmBtu, he refused to implement the UPA proposal to double prices for domestic gas to $8.4 since he believed this was a UPA scam, to primarily benefit Mukesh Ambani even though ONGC would also benefit enormously. Fresh investment dried up and Modi was forced to raise prices after two years. But thanks to various caveats—it applied only to new gas discoveries, that were in deep-water, etc—over three-fourths of India’s gas output gets just around 40% of the market price. Even in the case of oil where prices are supposedly freed for everyone, the Petroleum Pricing and Analysis Cell points out that ONGC gets $10 per barrel less than what it could get if it was selling to more sophisticated refineries than the PSUs to whom it supplies; Cairn-Vedanta is beset with similar problems (bit.ly/2tytFsK).

Other unfriendly policies include asking Cairn-Vedanta to raise its revenue share payments by 10 percentage points—it already pays around 85% of its revenue after deducting opex and capex—when it wanted its lease extended since it had found more oil; didn’t the country benefit by more local oil production and, given the government got a revenue-share anyway, its earning would go up significantly as output rose.

At one point, the government even asked oilcos to pay service tax on ‘cost petroleum’ (the share of oil/gas oilcos get to compensate for their costs), cash calls (the amount a consortium leader asks others to pay for production costs) and even royalty paid to the government! The government even tried to cap the cost that firms could recover even though the rules are clear that all costs have to be deducted from revenues in a producing field (bit.ly/2FutYYg).

While some of these issues have been fixed, more get added from time to time. In February 2019, the government said an empowered coordination committee would streamline approvals and a dispute resolution mechanism would be set up. The latter was finalised a few weeks ago; but with the caveat that anyone using the panel could not go in for arbitration against the government. Given that all the big private players have disputes with the government, why would anyone opt for a process that is controlled by a government-appointed panel? As for speeding up clearances, just 30 or so of the 55 blocks that were awarded under the OALP in October 2018 have got even an exploration license so far.

Another policy that hits production is the cess levied on pre-NELP fields like those owned by ONGC and Cairn; unlike a revenue-share on profits, the cess has to be paid on the production. Till 2012, the cess was Rs 2,500 per tonne — this was 8-10% of the price of crude— but this was jacked up to Rs 4,500 in FY13 and then converted to an ad valorem rate of 20% in March 2016. This may have protected government revenues when oil prices were low, but if oilcos end up paying a roughly double share of revenues as compared to earlier, they have a lot less to invest.

A recent Federation of Indian Petroleum Industry note to the finance ministry points out that, were the cess to be scrapped, the government share (assuming a $60 per barrel price) falls from $35.3 to $33; but since oilcos will have more money to invest as a result, if the production goes up by even 20%, the government gets more by way of the royalty, share of profits etc.

How much will production rise if various imports are lowered? Cairn-Vedanta estimates it can raise output by 50-60%—that’s 200 mn barrels over a decade—if the cess is abolished. Early last year, BP’s India head Sashi Mukundan said their analysis suggested that India could produce 100 tcf of gas, or nearly double the present estimate; and, if Indian oilcos used better recovery techniques, this alone would give another 4 bn barrels of oil, a figure that is roughly the current estimate of how much oil India can extract. All of this, however, presupposes a policy environment that is not full of caveats and subject to the interpretation of sundry bureaucrats. But, none of this can happen as long as the government’s aim is to protect its revenue-share and not to maximise production; the last OALP round, not surprisingly, never got even a single private sector bid.

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