Stepping on the gas PDF Print E-mail
Monday, 22 August 2016 04:38
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Exploration firms seem bullish after policy change

Petroleum minister Dharmendra Pradhan’s decision to move towards market pricing for natural gas in difficult areas in the deep seas—or ones where the temperatures or pressures are very high—appears to be paying off after several months. While exploration firms looked a bit hesitant to make a commitment to invest given the uncertain oil price scenario, with costs of exploration/drilling equipment also falling significantly, the investment outlook looks much brighter today—if oil/gas prices start rising over the next year or two, those investing now will stand to reap bigger gains. Briefing the media after a CII presentation to Pradhan, BP India head Sashi Mukundan estimated that the gas exploration companies would end up investing anywhere between R2.5-3 lakh crore over the next 4-5 years based on the likely existing reserves—a ballpark investment of around $3-4 billion is required for every 1 tcf and estimates are India has around 10-15 tcf of discovered gas between ONGC, RIL-BP, GSPC and Cairn India. Based on that, CII estimates this will generate around R2.5 lakh crore of revenues for the government—from royalty, profit shares and taxes on corporate profits—and, more important, it will result in import savings of around R10 lakh crore. Equally important, from the point of view of global warming, it will also increase the share of natural gas in India’s energy mix significantly.

Apart from the obvious gains to the economy as gas-based power and fertiliser plants start functioning at higher capacity, the more important lesson for the government is the implications of messing with free-market pricing. Though the gas exploration policy clearly specifies that free-market pricing will be allowed, this was given the go-by and though the UPA government tried to make amends towards the end of its tenure, the NDA refused to implement the recommendations of the Rangarajan committee on this. While enough analysts pointed out that it was uneconomic to extract gas at the current prices, even the state-owned ONGC’s break-even estimates for its deep-water wells was significantly higher than the price the government had fixed—the government, however, refused to relent, and a valuable two years were lost. While the government appears to have learned its lesson the hard way—last year, RIL decided to start concentrating on Mexico for exploration—in the gas sector, what is worrying is that it doesn’t seem to be applying the same learning to other sectors like pharmaceuticals or, more recently, genetically modified seeds


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