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Oiling the wheels PDF Print E-mail
Monday, 02 October 2017 04:39
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Need more than giving private players existing oil fields

 

Given the prime minister’s goal to reduce the import-intensity of the oil sector by 10% over the next five years, ONGC’s continuing poor production, and the poor response by private players to successive rounds of exploration for oil/gas, it is obvious the government needs to think of new strategies. Between FY07 and FY17, while ONGC’s gas production rose from 22.4 billion cubic metres (bcm) to 23.3 bcm, its crude oil production fell from 26.1 million tonnes (MT) to 25.5 MT. And while ONGC claims to have increased gas reserves from 540 bcm in FY07 to 788 bcm in FY16 and oil from 561 MT to 578 MT, the long delays in commissioning cast a doubt over the recoverability of the reserves. Given this, going by a Reuters report, the government may be looking at offering private players a stake in existing oil/gas fields operated by PSUs like ONGC—since the fields are already operational, the exploration risk gets taken out of the equation. If the news is correct, ONGC could have to share some of its best fields—what are called the ‘nomination blocks’, or those that were given by the government to the PSU in the past. Apart from giving private players a stake, other possibilities include tie-ups where, after production rises beyond a certain level, private firms could be given a share of the enhanced revenues.

Getting more oil/gas production, however, will take more than just getting ONGC to partner with private players in some of its best acreages since the government’s role in low oil/gas production is significant. In the KG Basin, for instance, political/bureaucratic interference stymied ONGC’s attempts to tie-up with global majors who had expertise in drilling in the deep seas. And, in the case of Cairn—India’s most successful private sector developer—the government’s record in harassing the company is a long one, and goes beyond just the retrospective tax claims on Cairn Energy Plc which actually did the major work on the Rajasthan block before selling it to the Vedanta Group. Till a few years ago, India did not allow oilcos to do continuous exploration in their blocks, and they had to stop after seven years and then focus only on extracting oil/gas. When Cairn found more oil/gas, the government sat on its request for an extension of its licence for a long time, and when it approved this, it asked Cairn to raise the revenue share paid to the government from 40% to 50%. And when the government finally agreed to shift to an ad valorem cess on crude—a $9 cess when oil was at $100 surely was quite different from when oil fell to $28 (January 2016)?—in the last Budget, it kept the rate at 20% to ensure the industry still paid the same $9-10. In the case of natural gas, though the policy and contracts clearly state freedom to price/market gas, till a year ago, the government didn’t allow this. Attracting more private players means fixing all of this.

 

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