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The government must clearly state its commitments to move towards free market price committed in NELP
A journey of a thousand miles begins with a single step. The fact that first step has been taken is reason enough to acknowledge its importance and mark the event. Its time to note that some politicians have acted like statesmen to look at the good of the country and accepted the reality of economics. We applaud them for not falling to the vote-seeking soundbytes.
Much more domestic gas shall now become commercial and add to consumers delight. We must also understand that it is not a time to rest. All exploration is not yet feasible at this price. The contracts that permit free market price are still in violation. Gas players have miles to go.
There was never an issue of gas prices till recent times. In nomination blocks of ONGC and OIL, gas was sold at whatever price the government wanted. Profit and loss were mere book-keeping entries.
During the PSC (production sharing contract) era, the exploration companies signed a contract that committed to a free market price reached at an arms length, to the maximum benefits of the government and the operator. It was only when the government tried to subvert the basic commitment to investors in PSC that the protests began. The government tried to reduce its budget deficit using an interpretation of gas utilisation policy that made free market price discovery impossible. The problem got further accentuated when the government tried to artificially hold the price line at the then discovered D6 price of $4.2. This price clearly made new discoveries in Deep Water (including GSPCs Deendayal) non-commercial. This also evaporated any remaining interest in the Indian fields. The message the operators got was: "Come and explore our geologyyou must complete a minimum work programme in a limited time regardless of the cost. However, if you find gas we shall tell you whom to give it and at what price. This shall be irrespective of the contract provisions or your commercial considerations. International companies withdrew. Indian companies both in private and government sectors started investing abroad for profitable exploration.
Rangarajan recognised the conundrum. He acknowledged the contractual obligations, but being too aware of fiscal pressures on the government, proposed a midway step that did not fully satisfy anyone. He, however, promised a real solution by 2017. One reason was that demand-side issues were not part of his remit. Everyone saw producer-consumer equation as a win-lose situation. Higher price to producer was seen as a loss to consumer, who was bound by limitations on his selling price. As such, consumers kept fighting for the continuity of the same policy. Much credit, therefore, must be given to the CCEA for cutting the Gordian Knot and separating the two issues.
Let us understand what is achieved. Priority sector consumers are assured of increased supply as well as protection of their margin through new policies yet to be formulated. This is independent of the producer take. Producers are assured of a price that differs from earlier price by a variable number derived from a transparent formula, removing the concern of a rigidity of price irrespective of market conditions. The country is assured of additional developments and production. It is also assured of restart of stalled exploration and renewed interest in future blocks that shall be put on auction in NELP X. There are some discoveries on hold, not being commercial at current prices. The new price makes these commercial. These can now be developed and, say, within two to three years we shall have more gas in the pipeline. This change is also likely to make some areasthat are not too deep or challenginginto commercially "attractive to explore areas. This number runs close to 30 TCF. It translates into investments exceeding $300 billion.
Let us also understand what this does not achieve. The operators do not get the price they have discovered according to PSC. Thus, they are likely to be losing compared to expected profit calculated at the time of bidding. The price also does not fulfil the criterion of free market price at arms length which was contracted in the PSC. So, the contract is still violated to the disadvantage of producer, government and economy. Rangarajan indicated a transition period of five years starting 2012. His solution was an interim measure that would have been withdrawn with full revert to PSC terms by 2017. The current guidelines remain conveniently silent on this aspect. The recent analysis by internationally-reputed consultants has clearly indicated that using the current exploration and development costs, another 25 TCF of yet-to-be-discovered (YTD) gas can be explored only if the prices exceed $10. Similarly, additional 30 TCF of YTD gas can be explored only if prices exceed $12. Both these prices are unlikely to be achieved with the current formula. We can safely assume that the dream of exploring all basins (India Hydrocarbon Vision 2025) shall remain just that at the current level of implementation.
Not only are some areas out of commercial bounds at these prices but even other areas that may seem commercially viable need to be bid by private risk capital providers. With a lack of clarity and commitment on the prices, and other violations of PSC like withdrawal of tax holiday on gas (80IB-9), imposition of service tax and imposition of ring fencing on subsequent exploration, new non-PSC conditions imposed at the time of farm out, denial or conditional/partial access, etc, it remains to be seen the amount of confidence this first step generates.
If the government imposes large amount of subsidy support on the primary beneficiaries of the above changelike ONGC, OILthen it is hard to see the availability of additional resources with them to do additional higher risk exploration. If they cant, who will fill the shoes that the private firms are unwilling to try. One can burn the candle at both ends but it does not last the whole night. ONGC and OIL can be forced to divert their resources from more prolific blocks they already hold to higher risk blocks that private sector vacates, but that shall only fill a political need, not the economic purse. The government must respect NOCs like commercial concerns if it desires comparable results from them. So, its no surprise that the reaction from upstream players has been positive but muted.
Let us now look at what needs to be done. In the area of gas prices, the government has already tasked Vijay Kelkar committee to work out transition mechanism. The government must clearly state its commitments to move towards free market price committed in NELP, starting immediately after Kelkar report and completing the process by 2017. It will assure the investors in the next NELP round to bid with a confidence that the PSC conditions shall be honoured. The outstanding uncertainties in taxation matters need to be clarified and the original benefits restored.
While other significant issues are another story for another time, the resolution of current issues impacting gas prices and a sincere attempt to a time-line should be adequate to bring many of the current operators back to the auction. After all, India has more than 1 million sq km yet to be explored, another 100 TCF yet to be discovered. Only when we move on this path shall we be able to complete this journey that started this June the 27th.
The author is secretary general, AOGO (Association of Oil and Gas Operators). Views are personal
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