Big reforms on anvil, but investors want past fixed
Given how the bulk of India’s natural gas reserves are to be found in the deep waters and are not being exploited because the government-controlled price is too low, the petroleum ministry’s plan to allow free-market-pricing is revolutionary. Not just in terms of what it will do to stimulate exploration activity, but in terms of its reforms spin-off. The main reason for price controls is that, were gas prices to rise, this will push up power and fertilizer subsidies – if the government is now willing to take a chance, it means it is willing to consider reforms such as market-pricing of fertilizers with direct subsidies to users. Also, since there cannot be free-market pricing as long as the government decides who is to get gas – city-gas and fertilizer firms get first priority today – the policy will have to be junked; after all if fertilizer plants are to get all the gas, why will power plants who can pay more for the gas even bid? Which means the government is prepared for a situation in which several priority areas may not get gas at low prices – that is true reform.
Similarly, allowing open acreage licensing policy instead of periodic auctions of fields the government wants to bid out means firms can choose the areas they want to explore in – once a firm has identified the block it wants, a quick bid can be organized and this will be done throughout the year. And given the sad history of companies that find their every decision being questioned by the government on grounds of costs, moving to a revenue-share will allow firms to go about doing their work much faster – this doesn’t apply to just Reliance Industries which is accused of gold-plating its KG Basin costs and has had $2.4bn of its payments stopped till FY14. Of course, since firms will be taking on a lot more risk as compared to the existing cost-recovery model, the government has to be prepared for the revenue-shares being quite low; more so since India is not known to be an oil/gas-rich area. If the government uses the oil cess funds to pay for 3-D seismic data for most of the country, as it has started doing, and if this shows better reserves, the revenue-shares could start rising. Having a sliding scale for revenue sharing is a good idea since it ensures windfall gains/losses due to oil-gas price hikes/collapses are shared with the government.
The problem with all of this, however, is that even the current policy promises both pricing and marketing freedom. And while it is true that contractual promise was not fulfilled for gas – it was for oil – the Rangarajan report was part of the UPA’s policy to move towards this; the NDA, however, put that on the backburner. So, if the government wants firms to take its proposed policy seriously, it will need to extend this policy to fields that have been discovered but which have not been worked due to the existing prices not being lucrative enough. Given that such fields are believed to have around 13-15 tcf of gas, this can help raise production by another 130-150 mmscmd in the next 5 years which will go a long way in meeting the prime minister’s goal of reducing import dependency, apart from bringing in $50-60bn of investment. The ball remains in the government’s court.