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Thursday, 05 December 2013 00:00
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PM needs to deliver on promises to oil investors

Given that, as the prime minister said at the 8th Asia Gas Partnership Summit, that India needs to increase its energy supplies by 3 to 4 times in the next two decades, he did well to assure investors of the government’s commitment to providing a stable and enabling policy environment for exploration. Promising something and delivering on it, however, are two different things. India’s history with oil/gas explorers is replete with broken promises, right from the time the NDA promised to remove petroleum subsidies and then went back on it as the elections approached. Not only did this play havoc with the oil PSUs, it forced private firms like Reliance and Essar who had ambitious plans to set up retail outlets across the country to mothball them and instead rely on the exports market. In the case of automobile manufacturers like Maruti Udyog who came up with a new petrol van at the time—the Versa for inter-city travel —this meant a stunning reversal since, with diesel prices remaining dramatically lower than petrol, the market preferred the old fuel guzzlers that ran on the cheaper diesel.

Things weren’t much better at the end of those exploring for oil. ONGC’s fate is well known and, apart from the fact that it is forced to sell oil at an 57% discount so as to help meet part of the R60,907 crore under-recoveries during the first half of 2013-14, the PSU has been slapped with a R10,000 crore tax demand from the Gujarat government. The tax demand, which the Gujarat High Court has upheld and which ONGC will contest, is ironical. Under the law, ONGC is supposed to pay royalty to Gujarat on the basis of what the oil sells for. That’s $22 a barrel, based on current oil prices, but since ONGC actually sells it to PSU oil marketing companies at $47, it paid royalties based on the price it realised. If ONGC loses the case, it will be a double whammy—it is forced to sell at a lower price but has to pay royalty based on a higher price. While those, like Cairn, who produce oil are better off since they are paid the international price, those like Reliance who produce natural gas get a price much lower than the market price even though the production sharing contracts said firms would be allowed to charge free-market prices. Fortunately, the government has moved to a half-way house by way of the Rangarajan-formula, but the sooner it moves to free-market pricing the better for everyone—the alternative to paying producers full market prices which incentivise them to produce more is to import LNG at significantly higher prices.


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