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Over a barrel PDF Print E-mail
Tuesday, 14 August 2012 00:00
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Cutting import dependence to 50% or raising it to 80%

Just how important the Prime Minister’s intervention in the oil sector mess is can best be seen from the presentation made by CII to the C Rangarajan panel on behalf of the oil companies—a more detailed company-specific presentation will be made by individual companies like Reliance and Cairn later today. According to the CII data, largely based on a study done by McKinsey, while India’s overall oil and gas self-sufficiency is 40% today (30% for oil and 67% for natural gas), this is likely to fall to as low as 20% in another 10 years on a business-as-usual basis, leading to annual oil imports more than doubling from $105bn this year to $250bn by 2022—while self-sufficiency in crude is expected to drop to 10% from 30% now, that for natural gas is forecast to fall to 30% from 67% right now. The interesting thing, however, CII points out, is that with the right policies, the self-sufficiency can be as high as 50% by 2022, resulting in $110bn less imports in 2022.

It’s not as if India has always got the equation wrong. CII points out that, in the period from 2003 to 2007, there was a sharp hike in exploration activity, from roughly $0.4bn in 2003 to $4bn in 2007—as a result, the number of exploration wells dug rose from 21 in 2003 to a whopping 72 in 2007. Since 2009, however, while the number of exploration wells rose 20% between 2009 and 2011 globally, there was a sharp decline in India with the number of exploration wells dug by the private sector falling by as much as 49%. 2D seismic activity fell 64% and 3D seismic activity fell 78% for private players. Coupled with the fact that there has been a sharp drop in the number of oil/gas blocks being auctioned under NELP, and within this the proportion being taken up by the private sector, this spells bad news for India’s oil future—just 13 blocks were awarded in NELP IX compared to the 34 on offer vis-a-vis the 31 awarded and 70 offered in NELP VIII. Indeed, though the public sector ONGC has managed to hold its own against the private sector as FE’s lead story today shows, the huge delays and unfriendly government policies have hit it equally badly. In the case of its KG Basin field, ONGC’s request to be allowed to dig 6 more exploration wells was kept pending for over two years.

What is surprising is that though the current system of allowing oil companies to first recover their expenditure from the sales of oil and gas is what allows the government/CAG to see whether private firms have padded their costs, CII has favoured retaining this model. In a pure revenue-share model, by contrast, the private firm’s costs are irrelevant (http://goo.gl/qlSjH). CII has restricted itself to just asking the government to give up its interference, and to stop changing policy—tax incentives are given and withdrawn, the DGH delays clearances and marketing freedom of companies is curtailed. While these are important issues, they don’t really address the heart of the problem, which is the government getting into the business of the private sector.

 

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