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How not to produce oil PDF Print E-mail
Saturday, 12 September 2015 17:53
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No extension for Cairn so far, huge cesses and more

 

Prime minister Narendra Modi may have set a target for reducing the country’s dependence on oil imports by 10% by 2022, and 50% by 2030, but you would never know that, going by the decisions being taken, and not taken, by the government. The impact of not being able to hike gas prices has, it is well known, ensured that gas producers likeReliance Industries are not exploring for new gas or developing the gas fields which have not yet been brought into the development phase. Even public sector ONGC has submitted its development plans for that part of its deep-sea field which is oil bearing—market-pricing is allowed for oil, not gas—and not the part that is primarily gas-bearing right now. And in the case of Cairn India, the country’s second-largest oil producer, it has been over 18 months since it put in a proposal to have the lease of its oil field extended, but no decision has been taken on this so far. That this is happening to Cairn is especially ironic since, while announcing the policy to throw open marginal oil fields to the private sector a few weeks ago, petroleum minister Dharmendra Pradhan used Cairn’s example to illustrate that a ‘marginal’ field could also turn out to be a major one. Cairn bought the Rajasthan block after it was abandoned by Shell as a dud field, discovered oil in 1999, and by 2011, it was producing 18% of the country’s oil production—by 2015, this had risen to over 27%.

Cairn, however, wasn’t done with Rajasthan since, based on the data its production wells were putting out, its geologists suggested there was more oil/gas. The Indian oil policy, ossified as it was, however allowed firms to explore in only the first 7 years and to use the remaining 18 to produce. In 2013, then oil minister Veerappa Moily saw merit in Cairn’s proposal to allow continuous exploration, and the firm struck oil again in Rajasthan—from an initial estimate of oil-in-place of 4.2 billion barrels in March 2013, it raised its estimates to 6 billion, and the figure could rise even more once more exploration is done. Since Cairn cannot take out all this oil by the time its lease expires in 2020, it wanted its lease extended. With no permissions given so far, how is the firm to plan its exploration budget/schedule—if, for instance, permission is given only for 5 years as the DGH is in favour of right now, why should Cairn step up its exploration activities since it will not be able to get the benefits of its efforts? Indeed, exploration leases should ideally be linked to the economic life of a field if the government is serious about cutting its oil dependence.

It gets worse. Though the government allows free-market pricing of crude, Cairn is forced to sell this at a discount—its crude is of a superior variety and the company is confident it can get 8-10% higher prices if it is allowed to export. Ironically, it sells most of the crude to private sector refiners at this lower price, and they get the benefit since they export the products from this crude. And since 75% of the money Cairn earns goes back to the government by way of cesses, profit petroleum and profit-share for ONGC, the biggest winner will be the government. Also, while the government raised the cess from R2,500 per tonne in March 2012 to R4,500, with oil prices crashing, this takes the effective cess from around 6-7% when oil prices were at $100 to a whopping 20%-plus today. Given this reality, how does the prime minister hope to convince firms to explore more?

 

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