|Getting it wrong on Cairn|
|Wednesday, 19 October 2016 00:00|
Export curbs make a mockery of marketing freedom
While the Delhi High Court has relied on certain provisions of the Production Sharing Contract (PSC) to dismiss oil producer Cairn India’s petition that it be allowed to export crude oil from its Rajasthan block, the government would do well to relook its strategy—the Delhi High Court verdict on Tuesday vindicates the government stand—since this makes a mockery of the stated policy of freedom-of-pricing given to exploration and production (E&P) firms like Cairn. The court has clearly relied upon Article 18.1 of the PSC which says the oil is to be sold to the ‘government or its nominee’ until the time ‘India attains Self-sufficiency’ in oil—since India has not achieved self-sufficiency, the court has interpreted this to mean Cairn cannot export. But this runs contrary to 18.7 which says the E&P firm can ‘freely lift, sell and export any Crude oil and Condensate which the Government has elected not to purchase’—since government PSUs like IOC have only been able to lift 16.2% of the total production from Cairn’s Rajasthan block, surely this means the E&P major should be allowed to export the rest. Indeed, even when the oil is to be sold to the government, 19.4 suggests the pricing has to be based on what is published in the Platt’s daily publication. Since there can be a dispute over which clauses are the dominant ones, the court has simply said Cairn is free to seek compensation which is allowed under the PSC.
What makes the case more unique is that Cairn is not contesting the price the government oil companies are paying, it is protesting having to offer the same price to private firms. Cairn’s output, it is well known, is waxy crude that sells at a high price overseas since new refineries have the ability to extract more high-value petroleum products from it—oil PSUs that have older refineries are not in a position to do so, and hence buy the crude at a discount. Since they are only able to buy a fraction—a sixth—of what Cairn produces, the E&P major ends up selling to private refiners like Reliance and Essar at the same discounted price; both, however, have sophisticated refineries and can extract a higher value from Cairn’s crude. Cairn’s argument, correctly, is that if private firms are free to export their product at the market price, there is no reason why they should get the PSU discount for the raw material—indeed, since the government gets 60-70% of all oil revenues, the lower $3-4 per barrel discount means it is the exchequer that ends up losing $120-160 million each year to Reliance and Essar; asking to be allowed to export was a means to transparently discover the price Reliance/Essar should pay.
While Cairn will appeal the court verdict in the Supreme Court, what matters for the government is that if firms are not allowed to freely sell in the market due to the self-sufficiency argument, and the prices are fixed by the government—in apparent disregard of 19.4—this means oil E&P firms do not have any marketing/pricing freedom. Since the government’s refusal to allow this freedom for gas producers led to them stopping most E&P activity over the last two years—it was then that the government decided to start freeing up gas prices—the last thing it wants is for oil E&P firms to do the same thing.