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Tuesday, 20 January 2015 00:00
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Delaying field extensions makes little sense

If it wasn’t bad enough that government policy is hurting investments in the telecom sector, things aren’t much better in the oil and gas sector, the other area where investors are still prepared to invest in India in a big way. The ministry of oil and gas, under the UPA as well, made heavy weather of raising prices of natural gas and, as a result of this, India has effectively lost one year of production/exploration and it remains to be seen how it fixes this. As FE reported last week, private sector oil and gas companies have proposed a formula based on the prices of alternative fuels and the price of that works out to around $5.7 per mmBtu today—on an apples-to-apples basis, that’s probably a 25-30% premium over the price fixed by the government recently.

Equally problematic is the delays in giving extensions to existing producing fields where, thanks to fresh finds, oilcos need more time to be able to extract the oil/gas they have found. Under the earlier regime, India did not allow oilcos to explore for oil/gas after a certain period of time, but since this was detrimental to exploration efforts, the UPA allowed continuous exploration. The first company to really strike it rich from this was Cairn India which reported big finds in its Rajasthan fields, big enough for it to ask for an extension in its exploration licence. It has been almost a year since Cairn applied for this, but the permission is yet to be granted. Given how India imports around 80% of its oil needs and how
70-80% of all oil production goes back to the government in the form of cesses, royalty payment and the like, you would think the extension would be a pretty routine thing—ideally, a field should be given to an exploration company till its natural life is over. In the case of Cairn, the government is reportedly considering allowing an extension subject to the proviso that Cairn allow the state-owned ONGC to hike its share in the joint venture.

Why this should even be contemplated is not clear, but imagine the signal this sends out to potential investors—that should they discover more oil and gas, the government is going to alter the terms of the contract to cap their upside. A similar proposal, this time to increase the government’s revenue shares, is being suggested to allow extension to small- and medium-sized fields. Given India is not an energy-rich country where oilcos are rushing to invest, any proposal that adversely affects the profit profile of investing needs to be looked at carefully.

 

 

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