Privatising ONGC vs death by a thousand cuts PDF Print E-mail
Tuesday, 05 December 2017 00:00
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As the government seeks to give away some of the PSU major’s oil/gas fields, it needs to see if this is the real solution

Given the government’s inability to take tough decisions on privatising PSUs, it is not clear how it plans to take away various performing oil/gas fields from ONGC and give these away on a profit-share to various private oilcos—the one that promises the most output will likely win the bid and get a 60% share in these fields. These fields produce around a fourth of ONGC’s oil and gas output, so logically the PSU’s board has to oppose the move—unless the government can demonstrate to it that the increase in oil/gas will be so much after the fields are given to the private sector that ONGC stands to gain with even a lower equity share in the fields. Of course, given ONGC’s board went along with the government’s suggestion to spend around Rs 33,000 crore to buy its 51% stake in HPCL, getting the board’s approval may not be that tough either.

Considering how ONGC’s production has fallen,it is not surprising the government should feel frustrated—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 this happened while ONGC has increased gas reserves from 540 bcm in FY07 to 788 bcm in FY16 and oil from 561 mt to 578 mt. Before rushing to condemn ONGC, it is important to understand why it has not been able to monetise these new discoveries. For one, while many of them were in the deep seas, till last year, the government’s gas-pricing formula was not lucrative. Even today, with prices for gas in the not-difficult areas very low, no one—including ONGC—will find it lucrative enough to do fresh exploration. If the government wants more output, it simply has to implement ‘marketing freedom’ which means ONGC—and other private players—must be able to sell their gas as the price India imports it at, around $6-9 per mmBtu right now. More important, like all PSUs, ONGC is hampered in its operations by what is called L1-itis—instead of looking for the best supplier, it has to look for the least costly, and while a tender can be designed to avoid this pitfall, it makes the process slower and this is always susceptible to legal challenge. As long as there is no genuine marketing freedom and till ONGC is hampered by L1-itis, its production will also grow slowly, even fall, and the government will want to keep taking away acreage from it.


Whether outright privatisation is better than death by a thousand cuts is something the government needs to think about. It is also not clear if enough private players will rush to claim ONGC’s fields. India’s most efficient private sector firm, Cairn India, is still smarting from the government raising its revenue-share from 40% to 50% when Cairn found more oil/gas and wanted its license extended. And when the government finally agreed to shift to an ad valorem cess on crude in the last Budget—in keeping with the fact that a $9 cess when oil was at $100 a barrel was quite different when oil was at $50—it kept the rate at 20% to ensure the industry still paid the same $9-10 per barrel. India cannot hope to reduce the import intensity of the oil sector by 10% over the next five years if it doesn’t do well by both its PSUs and private investors.


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