Nelp is good but needs to be better

The government seems to be banking on private players to expedite its oil and gas exploration programme. That is what comes out from the Economic Survey 2009-10, where discoveries made by RIL and Cairn India find special mention.

Credit should go to new exploration licensing policy (Nelp) introduced by the government in 1999. However, the question is if the government wants to attract private investment in exploration business, why is it so stingy in offering sops to the sector that—in any case—involves highly capital-intensive and risky ventures.

For example, the government has consistently declined to accommodate the oil sector’s request for exemption from service tax for services availed for undertaking exploration work. The government has also failed to adopt a clear-cut policy on extending the tax holiday for the oil and gas sector. There is merit in these demands of the oil sector given that contractors have to write off all expenditure incurred in exploration if they fail to make a discovery. Costs are recoverable only when contractors make a commercial discovery.

Meanwhile, the government has also started intervening in the determination of price for natural gas production from these blocks, despite committing full marketing freedom to contractors in production sharing contracts (PSCs) signed with them. The D6 gas is an example. In a bid to avoid the possibility of accepting government-determined pricing, many private players have already started going slow on their production plans for discovered fields. This does not augur well given that the number of prospective blocks is declining with every Nelp round.

The government has allocated 203 acreages for exploration through bidding held under Nelp. This has helped the government attract investment of $11.9 billion in the sector. Since introduction of Nelp, more than 600 million tonnes of oil and oil equivalent hydrocarbon reserves have been added.

“The availability of gas from the D6 and utilisation of surplus gas available on fallback basis resulted in better utilisation of capacity and higher plant load factor (PLF) as also high growth in electricity generated from gas-based plants,” the Survey says. It also makes special mention of Cairn India’s Barmer block in Rajasthan. At peak level, production from the block will account for as much as 20% of India’s total crude oil production.

The government has made a huge savings on fertiliser subsidy payment because of switchover of some naphtha-based fertiliser plants to natural gas after RIL started production from its D6 block last April. Meanwhile, power generation in the current financial year has also improved significantly because of increased domestic availability of gas. This is despite a fall in power generation from hydro and coal-based power projects.

The government plans to raise the share of gas-based power generation in the country’s energy mix. However, this cannot be achieved if domestic production starts stagnating. Significantly, the domestic coal sector is unable to keep pace with the fast-growing demand of the power sector.

The government should learn lessons from past experience. For example, the Union power ministry had envisaged a sizeable chunk of its capacity addition in the 10th Plan based on natural gas. However, most of these projects could not be commissioned in the absence of appropriate fuel linkages. The result was that coal continues to remain a fuel of choice for power generators and accounts for more than 50% of India’s primary energy consumption.

This trend started changing after RIL started production from its D6 block in the KG basin. Fertiliser plants are switching to natural gas. This has helped them to cut cost and increase production.

Oil and gas exploration is supposed to be the backbone of every country’s energy security. India meets about 80% of its crude oil requirement through imports. And the country’s dependence on imported oil is expected to increase in the coming years as its economy is on a high-growth trajectory.

But upstream companies like ONGC and OIL are feeling a strain on their finances as they have to share OMCs’ under-recoveries on retail sale of petrol and diesel. While the Kirit Parikh committee has recommended measures to deregulate the petroleum retailing sector, it has ignored the plight of upstream companies that are reeling under the subsidy burden.

For example, the committee has recommended mopping up a portion of the incremental revenue accruing to ONGC and OIL from their production in nomination blocks and providing cash subsidy from the Central budget to meet the remaining gap. This would impact upstream companies’ cashflows, forcing them to cut down on exploration budgets.

Consider that ONGC’s natural gas production has declined over the years because of the lack of investment by the company in ageing gas fields. The company is not able to recover even its cost of production by selling gas under the administered price mechanism to customers in sectors like power and fertiliser. So, it has little interest in investing in these ageing gas fields.

In such a scenario, India’s energy security cannot be ensured if private players also lose confidence in the government’s fiscal and regulatory policy relating to the upstream hydrocarbon sector.

Source: Financial Express

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Major oil, gas discoveries ensure energy security

The government remains bullish on domestic oil and gas sector even as serious bottlenecks in areas like land acquisition, fund mobilisation and timely regulatory approval are hampering growth in other infrastructure sectors.

India has made major oil and gas discoveries in recent years that should go a long way in ensuring the country’s energy security. And the credit goes to the national exploration licensing policy (Nelp) which has helped in expediting the government’s exploration programme by attracting private investment. Reliance Industries Ltd (RIL) and Scottish company Cairn Energy have made most significant discoveries from blocks awarded under the Nelp regime. Production from these discoveries—natural gas available from RIL’s K-G D6 block and crude oil from Cairn

Energy’s Barmer block in Rajasthan — have dramatically changed India’s energy sector scenario. Sectors like power and fertilisers that use natural gas as fuel and feedstock have also benefited from the D6 gas. These discoveries find special mention in the Survey.

“Availability of gas from K-G D6 and utilisation of surplus gas available on fallback basis resulted in better utilisation of capacity, higher plant load factor and high growth in electricity generated from gas-based plants,” the Survey has noted. With 75% of total oil consumption in the country being met via imports, the dependence on imports for petroleum and petroleum products continues to be high. During the past five years, domestic supply of crude oil stands at 34 mmt and natural gas at about 32 billion cubic metric tonne. “With 15 new oil and gas discoveries during the current fiscal, domestic availability is expected to improve. During 2009-10, the projected production for crude oil is 36.7 mmt, compared with 33.5 mmt in 2008-09. This is due to increase in crude oil production from Rajasthan (2.4 mmt) and the K-G deepwater (0.8 mmt). The projected production for natural gas, including coal bed methane in 2009-10 is 52.8% higher than the actual production of 32.8 bcm in 2008-09. The increase in gas production is primarily from the K-G block.”

Source: Financial Express


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RIL's Jamnagar unit beats the heat on SEZs

At a time when developers are increasingly scrapping their special economic zone (SEZ) projects, Reliance Industries’ SEZ at Jamnagar, which houses a Rs 25,000-crore refinery, emerged as the country’s largest SEZ in the current financial year, with exports crossing Rs 62,000 crore till January.

By March 2010, SEZ exports from Jamnagar refinery are expected to touch Rs 75,000 crore. This will contribute about 35-40 per cent of the country’s overall SEZ exports,” Development Commissioner (Jamnagar SEZ) Upendra Vasishth said. Reliance set up its refinery, over 700 hectares of the 1,700 hectares earmarked for the SEZ project.

In 2008-09, exports from SEZs in India were clocked at a modest Rs 99,689 crore. The multi-product Surat Special Economic Zone, or SURSEZ, was the largest exporter with Rs 15,000 crore worth of exports, followed by the Nokia SEZ in Tamil Nadu with Rs 10,000 crore exports, according to a Central government official.

“This year, Reliance’s Jamnagar SEZ has been the highest exporter, followed by Surat SEZ and Nokia SEZ,” the official added said

Source: Business Standard

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Is spiked petrol a good idea?

Any policy on blending ethanol with petrol has to keep in mind the costs involved in ethanol production - excessive use of scarce water to grow sugarcane and the effluents discharged in the process.


Apart from reducing feedstock for the chemicals industry, there are environment costs of the bio-fuel policy that are quite significant

The government has reiterated its intent to blend gasoline with an ethanol content of 5 per cent. In the past decade, the government made several efforts to implement an ethanol programme but it has never been successful. In fact, its recent announcement is a pull-back from its intent to increase the blend to 10 per cent with effect from October 2008. It is time that policy makers realised that a bio-ethanol programme can never be successful in India for varied and obvious reasons. The search for clean energy should be directed towards areas where success can be attained.

India is a growing economy with an ever-increasing need for energy and food. The primary objective of an energy policy is to ensure energy security — the economic and environmental aspects are secondary in nature. Thus, sustainability of an energy source is a crucial element. Unfortunately, at present, the only source of ethanol in India is molasses, a by-product obtained during the manufacture of sugar. Sugar production is extremely volatile in India, hence the availability of molasses and thus ethanol is inconsistent. Under these circumstances, India can never have a sustainable ethanol programme.

A consistent availability of sugarcane for the production of sugar as well as ethanol would require a revamp of the government’s policies pertaining to sugarcane pricing and the sugar industry. Moreover, India is the largest consumer of sugar in the world. Thus, to ensure adequate availability of sugar, the government would need to tread cautiously in encouraging production of ethanol directly from sugarcane juice.

The “National Policy on Bio-fuels”, which was announced by the government recently, lays down the criterion for bio-fuel development in India. With regard to ethanol, the Policy categorically states: “The sugar and distillery industry will be further encouraged to augment production of ethanol to meet the blending requirements prescribed from time to time, while ensuring that this does not in any way create supply constraints in production of sugar or availability of ethanol for industrial use.” Thus, the Policy rightfully acknowledges that it would not be desirable to appropriate sugarcane for manufacture of ethanol. Also, it would not be desirable to appropriate ethanol for fuel blend and starve an existing industrial sector, which already plays a key role in the manufacture of environment-friendly chemicals, adds value to ethanol and generates employment.

A cardinal mistake is to believe we can emulate Brazil’s success in the sphere of bio-ethanol. It is important to understand the unique strengths that Brazil has — vast tracts of arable and fertile land that were once vacant and are now being used for production of bio-fuels. In Brazil, 60 per cent of sugarcane juice is directly converted into ethanol without compromising the availability of sugar. Also, large land holdings and contract farming allow mechanised cultivation and better agricultural practices. In India, the yields are much lower and fragmented land holdings discourage mechanisation. More important, sugarcane is a water-intensive crop, and since water is a scarce resource in India, it would be highly imprudent to put it to such use. Interestingly, Brazil reduced the ethanol blend from 25 per cent to 20 per cent in 2009, and demand for ethanol fell sharply from 2 billion to 1 billion litres per month due to lack of availability of adequate ethanol.

Also, the advocates of ethanol tend to conceal the fact that manufacture of ethanol causes lots of pollution, by way of discharge of large volumes of effluent (1 litre of ethanol discharges 12 litres of effluent). It also contains a very high concentration of organic materials that are extremely harmful to the distillery’s hinterland. Management of distillery effluent is a major area of concern for the environment ministry. Therefore, the ethanol programme needs to take a consolidated view of its purported benefits, and its end result would not be as favourable to the environment.

The cornerstones of a successful bio-fuel programme are: Sustained availability, right price, generation of rural employment, usage of waste lands and waste bio-mass, and avoidance of cannibalisation of feedstock for existing users.

As a bio-fuel, ethanol fails miserably to meet any of these criteria and, thus, this initiative deserves to be consigned back to the drawing boards for a rethink before its implementation.

GK Sood
Co-Chairman, Ethanol Promotion Sub-Committee, ISMA*

Doping makes petrol non-carcinogenic and also promotes energy security. In years of poor production, the chemicals industry can import substitutes

It is an acknowledged fact that transportation fuels are a major contributor to pollution. Methyl tertiary butyl ether (MTBE), an oxygenator blended in gasoline in order to improve combustion, is known to be carcinogenic and non-biodegradable. All across the world, MTBE is being replaced with ethanol, which is absolutely safe on both these counts. Moreover, greater use of ethanol, a renewable resource, in gasoline can also reduce dependence upon petroleum, and this will promote energy security. Therefore, the government has already mandated blending of minimum 5 per cent ethanol in gasoline and has announced the goal of 10 per cent blending, going forward.

The level of 5 per cent blending, incidentally, meets the amount of oxygenation required in gasoline blends to neutralise carbon monoxide emissions, hence it should not be compromised at all.

Moreover, blending of ethanol in gasoline also makes eminent economic sense for the government and oil marketing companies (OMCs). At the current price of ethanol and the ex-pump price of gasoline, every litre of ethanol blended in gasoline results in a saving of about Rs 11 for the OMCs. Thus, the ethanol blending programme can also mitigate the burden of “under-recoveries” suffered by the petroleum sector.

The principal raw material for production of ethanol in India is molasses, a by-product derived during sugar production. Several agricultural products and waste can also be used for distillation of ethanol, depending upon their availability. A growing ethanol industry will boost the demand for agricultural waste and agricultural products suitable for distillation and molasses, which will boost farmers’ income significantly.

The country has an alcohol production capacity of 3.65 billion litres per annum, of which fuel ethanol capacity is 1.69 billion. In a year of normal sugar production, molasses’ availability is sufficient for production of 2.4 billion litres of alcohol, leaving the balance capacity for utilisation of other raw materials. In a year of low production of sugar, like the current year, available molasses would yield 1.70 billion litres of alcohol. The production of alcohol from other inputs is currently estimated at about 300 million litres and is rising. Aggregate alcohol production during the current year is thus estimated at 2 billion litres.

No one should disagree that the first claim on domestic available alcohol should be for fuel ethanol, given the priority that the gasoline blending programme calls for. At 5 per cent level of blending in the states to which the current mandate extends, the demand for ethanol is 690 million litres. The next priority would be for potable use, the demand for which is an estimated 900 million litres, there being no substitute. The balance is available for users like the chemical industry.

The ethanol blending and potable sectors have no alternative to alcohol, unlike the chemical industry, which can and does often use petroleum-based chemicals as alternatives to alcohol, e.g. by-products arising from petroleum refining. As a matter of fact, the chemical industry does optimise its input costs, as any industry would do, by switching from alcohol to petroleum derivatives and vice versa, depending upon relative costs, and does not necessarily purchase alcohol in consistent quantities.

The alcohol industry treats all the three — petroleum companies, potable alcohol industry and chemical industry — as valuable customers. The national priority, however, lies in pursuing the gasoline blending programme in right earnest as vital issues of health and environment are involved. As a matter of fact, there is justification in extending the blending mandate to all parts of the country. In most years, the country produces enough alcohol for the chemical sector too. Nevertheless, this sector has access to import of alcohol, which is freely allowed. The subdued petroleum prices since mid-2008 have seen this sector shift to petrochemicals from alcohol. This sector has also imported significant quantities of alcohol in the years of low international prices for the commodity, particularly from Brazil.

We are absolutely certain that the government will not fail in its duty to the nation by dithering on its mandate of 5 per cent ethanol blending in gasoline on the false premise of lack of availability as, we believe, it considers that its responsibility on health and environment fronts are of paramount importance.

Source: http://www.business-standard.com/india/news/is-spiked-petrolgood-idea/386619/
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Oil strikes 6-week high amid Greece bailout talk

Oil prices rose to a six-week high above $80 a barrel on Monday, extending the previous session's gains, as speculation over a quick bailout for debt-laden Greece helped pushed the U.S. dollar lower.

Concerns about an extended refinery strike in France and escalating tensions over Iran's nuclear program also lent support to oil prices.

U.S. crude for March delivery rose 57 cents to $80.38 a barrel by 0254 GMT, after having struck $80.47 -- the highest since Jan 13. London Brent crude rose 63 cents to $78.82 a barrel.

"The weak dollar is the biggest driver for crude prices this morning and hopes of a financial rescue for Greece are propping up sentiments," said Clarence Chu, a trader with Hudson Capital Energy in Singapore.

The U.S. dollar index fell 0.29 percent against a basket of currencies on Monday, as investors reassessed chances of an earlier-than-expected interest rate hike by the Federal Reserve while the euro was lifted by speculation of a quick bailout for Greece.

German weekly Der Spiegel reported on Saturday that Germany's finance ministry had prepared plans in which countries using the single currency would provide aid worth between 20 billion and 25 billion euros for debt-laden Greece. The ministry refused to comment on the report.

Concern over Athens' ability to repay its debt mountain has shaken confidence in the euro and stirred fears that it may hinder global growth. Some analysts have said that a plan to rescue Greece would help allay sovereign debt concerns in Europe.

Separately, an extended strike at Total's six oil refineries in France and growing hostility between Iran and the West also aided bullish sentiment for crude. 

Talks between Total and workers protesting the possible closure of the company's Dunkirk refinery in northern France collapsed on Sunday, the CGT union said, calling for a strike to spread to all French refineries.

An extended strike would lift Europe's gasoline prices and also push up prices across the energy complex, market participants said.

Russia said on Friday it was "very alarmed" by Iran's failure to cooperate with the IAEA, after the U.N. nuclear agency said it feared Tehran might be working to develop a nuclear missile.

Oil prices rose 7.7 percent rise on the week, their largest single-week percentage gain for front-month crude since October, thanks to a combination of positive economic data and growing tensions over sanctions against Iran.

Analysts said Wall Street could keep rallying after notching its best week this year if Federal Reserve Chairman Ben Bernanke gives a reassuring assessment of the recovery and retail earnings show improvement.

On OPEC rumblings, a senior Iranian oil official said on Saturday the producer group was unlikely to raise its output ceiling at its next meeting in March.

Money managers hiked their net long crude oil futures position on the New York Mercantile Exchange in the week through Feb. 16, the Commodity Futures Trading Commission said on Friday.

Source: Reuters.com

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RIL raises offer for Lyondell to $14.5 bn

Reliance Industries (RIL) is believed to have raised its offer for bankrupt petrochemical firm LyondellBasell Industries by about $1 billion to $14.5 billion.


RIL had in November made a preliminary, non-binding offer for fuels- and chemicals-maker LyondellBasell and revised it to about $13.5 billion last month.


On the heels of the bankrupt company's unit Lyondell Chemical Co reaching a settlement with its unsecured creditors and lenders, RIL is believed to have raised the offer to $14.5 billion, sources in know of the development said.


The Indian firm has now offered Lyondell creditors the option of cash or equity in the company.


"The (RIL) management was till Saturday (February 20) mulling on revising offer for Lyondell. They were debating whether to say in contention or drop out. To my understanding, they may have decided to stay on," a source said.


A deal between RIL and Lyondell would create a global energy and chemicals giant, with annual revenues estimated at near $80 billion. The world's third-largest independent chemical company would give RIL petrochemical plants two oil refineries and access to the US fuel market.


RIL shares fell by 0.54 per cent to close at Rs 978.90 on the Bombay Stock Exchange.


Houston-based Lyondell Chemical had in December filed a plan to reorganise while evaluating the offer from RIL, pitting the Mukesh Ambani-firm against lenders.


Lyondell has said it plans to reorganise by repaying its $8 billion bankruptcy loan in full and giving an equity stake in the new company to lenders, including sponsors of a $2.8 billion rights offering.


In the settlement reached with unsecured creditors last week, Lyondell Chemical Co agreed to pay $450 million, a move that may help the company exit Chapter 11 bankruptcy.


Source: PTI
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Oil Traders Boost Long Positions for First Time Since January

Hedge- fund managers and other large speculators increased last week for the first time since January, according to the U.S. Commodity Futures Trading Commission.

Long positions, or bets that prices will rise, outnumbered shorts by 68,436 in the week ended Feb. 16, according to the commission’s Commitments of Traders report Feb. 19. That’s a 63 percent increase from the week before and the first increase in five weeks. Speculators also added to their long positions for gasoline and heating oil.

“Index funds, ETFs and other types of managed money accounts were buying, but they covered more shorts than they bought new longs, which gives the overall flavor a bit of a bearish taste,” said Peter Beutel, president of trading adviser Cameron Hanover Inc. in New Canaan, Connecticut. “Producers were selling.”

Overall open interest fell 5,978 contracts to 1.30 million during the period, according to the CFTC report.

The bets that oil prices would increase had dropped 69 percent in the four weeks through Feb. 9. Speculative long positions have outnumbered short positions since May.

Oil for March delivery rose $3.26, or 4.4 percent, to $77.01 a barrel on the New York Mercantile Exchange in the week ended Feb. 16.

Who’s Buying

“The ones buying new longs were certainly those people responding on the days when the dollar was weak or equities were higher or there was fresh economic news that favored a recovery,” Beutel said. A weakening dollar boosts demand for commodities as an alternative investment, and advancing equities are seen as a sign of a strengthening economy.

Long positions on gasoline also increased for the first time in five weeks. They outnumbered shorts by 58,036, an increase of 4,600, or 8.6 percent, from the week ended Feb. 9. They had dropped 30 percent in the previous four weeks to the lowest this year. Gasoline long positions have outnumbered shorts since the launch of the RBOB contract in 2006.

Long positions on heating oil outnumbered shorts by 16,184. The gain of 1,426, or 9.7 percent, snapped a five-week decline to 14,758, the lowest level since March 20.

Hedge-fund managers and other speculators increased their net-short positions in natural gas for the first time in four weeks. Shorts outnumbered longs by 154,292, up 2.3 percent from 150,827 the previous week. Shorts have outnumbered longs since March 2007.

Analysts and investors follow changes in speculators’ positions because such transactions can reflect an expectation of a change in prices.

Source: http://www.bloomberg.com/apps/news?pid=20601103&sid=a5afqRAiJhwA

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Gas may get dearer for power, fertiliser firms

Ministry wants ONGC, OIL supplies priced at $4.2 per mBtu

Power and fertilizer companies may have to fork out substantially higher price for gas being consumed from state-owned oil companies like Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL). 

Price of gas supplied to companies in these two sectors by ONGC and OIL from its nominated gas fields may be hiked to $4.2 per million British thermal unit (mBtu) from prevailing $1.82 per mBtu. 

Gas prices for power and fertilizer sectors will be done in three tranches over next three years. But for small and medium enterprises apart from city gas distributors, the hike may be immediate and in one go.

Petroleum Minister Murli Deora will shortly move a proposal before the Union Cabinet seeking revision in gas prices for that being supplied from ONGC and OIL. 

Gas being sold at administered rates is much lesser than market price and below cost of production. This price is applicable to fields given on nomination basis prior to new exploration and licensing policy (NELP). About 97 per cent of ONGC’s total gas production is sold under APM, while in case of OIL it is approximately 85 per cent. 

“The oil ministry has prepared a cabinet note to hike price of the gas sold under administered price mechanism (APM),” a petroleum ministry official said. The sectors have been divided into two categories --- power, fertilizer and others. The hike for the first group will be done in three stages spread over three years, while for others it will be a one-time hike, he added.

Petroleum ministry will send the note for cabinet approval in couple of weeks, the official said adding that the decision has been taken after consultation with all concerned sectors. Fertilizer and power ministry are opposed to any hike in gas price as the tariff of fertilizer products and electricity is bound to go up. Both these sectors have already been complaining of high cost of inputs like gas, coal and naphtha.

Gas sourced from other fields such as Reliance Industries Limited (RIL)-operated D6 block in Krishna Godavari basin costs $4.20 per mBtu, while gas from British Gas group-operated Panna, Mukta and Tapti fields are priced at $5.73 per mBtu. Companies pay $5.50 per mBtu for gas from Ravva field operated by Cairn India in Andhra Pradesh. RIL gas price has become the bone of contention between the two Ambani brothers, Mukhesh and Anil Ambani. 

R S Sharma, chairman and managing director of ONGC said that more than 95 per cent of gas produced is sold to GAIL at APM price. “Considering the cost of production (as per cost audit records) and return on capital employed as per tariff commission, ONGC incurred an under-recovery of Rs 4,745 crore in 2008-09. There was a loss of Rs 2,423 crore during the year even ignoring the return on capital employed. These under-recoveries are being met out of ONGC’s oil business,” he added.

At present, ONGC produces 463 billion cubic metres (BCM) of natural gas from 111 fields, according to data available on its web site.

After the price revision of gas sold under APM, we expect to earn Rs 200 crore annually on the top line and nearly Rs 120 crore on the bottom line, said T K Ananth Kumar, director finance of OIL. 

Most of the gas produced from its fields in Assam is sold under APM, he added. OIL produced 2268.38 mmscm of natural gas in 2008-09, according to a petroleum ministry publication. It sells gas to Brahmaputra Valley Fertilizer Corporation Limited, North Eastern Electric Power Corporation Limited (NEEPCO), Assam Petrochemicals Limited and tea gardens among others.

Source: www.mydigitalfc.com

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RIL produces gas worth $1.5 bn from D6 fields

Reliance Industries-operated D6 gas field in the Krishna-Godavari (KG) basin has produced more than 10 bn cubic meters of natural gas worth over $1.5 bn in the first 10 months, a senior official in the oil ministry said. RIL commenced gas production from its KG-D6 on April 2, 2009. 

Oil minister Murli Deora confirmed that the ministry has reviewed gas production from KG-D6. “It is a major achievement in country’s energy security. The (gas) production has helped industries particularly power and fertiliser sectors,” he told ET. 

As per an oil ministry’s note, about 22 million standard cubic meter per day (MMSCMD) gas from KG-D6 is supplied to power units. “This has helped in generating an additional 5,000 MW power. It not only reduced the cost of producing power but also revived four stranded power plants in Andhra Pradesh,” the official said requesting anonymity. 

“Now most of these power plants (getting KG-D6 gas) are running on a 90% plant load factor (PLF),” he added. PLF is measurement of average capacity utilisation of a power plant. Earlier, PLF of these power units was around 60%. 

Due to the KG-D6 gas, government has been able to save subsidies on urea production to the tune of about Rs 4,000 crore, he said. 

RIL is currently producing about 60 MMSCMD gas from KG-D6. “It is an achievement that the company has ramped up gas production in such a short time. It is only 20 MMSCMD less than achieving peak production level of 80 MMSCMS,” he said. At present production is taking place in 16 wells. But all 18 wells of KG-D6 are ready to commence production. 

Reliance has already signed gas sale purchase agreements (GSPAs) with 48 customers for supplying over 61 MMSCMD. Consumers are specified by an empowered group of ministers (EGoM), and they are from fertilisers, power, city gas distribution, steel, LPG, refinery and petrochemical sectors. 

In December 2009, RIL successfully tested the design capacity of its KG-D6 deepwater gas production facilities which gave a flow rate of 80 MMSCMD. RIL has been able to produce first gas from its KG-D6 block in a record time of six and a half year. Normally, deepwater production of such scale takes 9–10 years time. The KG-D6 gas field is one of the top five largest deepwater gas projects globally.

Source: Economic Times

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RIL fully cooperating with audit: CAG

The Comptroller and Auditor General (CAG) has stated that Reliance Industries is providing full access to records and making available copies of documents it has sought for audit of expenses incurred on the nation's largest gas field. 

CAG, which started audit of the Krishna Godavari basin D6 field on December 21, after completing the first round of scrutiny sought a completely new set of documents and access to RIL's entire corporate SAP (computer-based accounts). 

However, since the documents and the photocopies of records sought ran into thousands of pages, there was a delay, prompting CAG to shoot off a complain to the Oil Ministry. 

Within weeks of the January 27 complaint, CAG has again written to the Petroleum Ministry saying it has made progress in receipt of requisitioned documents as well as their copies. 

"There has been progress both in receipt of requisitioned documents as well as in making photocopies," CAG Principal Director of Audit K R Sriram wrote on February 12. Since, the entire RIL is not being audited by CAG, segregating records pertaining to on the KG-D6 fields was taking time. 

CAG's scope of audit of PSC in respect of the block KG-DWN-98/3 (KG-D6) awarded to RIL, for two financial years - 2006-07 and 2007-08, with access to records of previous years linked to transactions of these years. 

It is also understood that scope of this audit will far exceed the normal course of audit by CAG and the prime objective may be to detect fraud, if any, by the operator (RIL) allegedly in collusion with the oil regulator DGH and Ministry of Petroleum and Natural Gas. 

Sources said while the ministry wanted special audit of accounts from 2003-04 fiscal, CAG wanted scope of examination of records be restricted to 2006-07 and 2007-08 only. 

The government in 2002 asked CAG to audit PSCs like the one for KG-D6 block with RIL, but the premier auditor had then stated that its charter neither permitted audit of private accounts nor did it have the manpower to do so. 

Subsequently, the government with the concurrence of CAG, appointed independent third-party auditors on the basis of an open bidding process. These auditors have audited accounts of companies like RIL. 

However, in 2007, CAG was asked to audit the exploration spending and the agency conducted audit of all the private company reports, copies of which were available with the DGH. To close the audit, they needed to seek originals, which have now be made available to them, they said.

Source: Economic Times

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NTPC signs for more KG-D6 gas

State-owned power utility NTPC Ltd has signed agreement to buy 1.2 million cubic meters a day of more gas from Reliance Industries' eastern offshore KG-D6 fields at the government-approved price of USD 4.2 per mmBtu.

NTPC signed Gas Sale and Purchase Agreement (GSPA) to buy more gas on February 16, taking its total supplies from KG-D6 to 1.81 mmscmd, sources in the know said.

The government had in October 2009 allocated NTPC 3.85 mmscmd, beyond the 0.61 mmscmd it had earlier signed for.

But NTPC did not want to use the KG-D6 gas at its Kawas and Gandhar power plants in Gujarat, which are connected with pipelines ferrying KG-D6 gas from the Andhra coast. So, a swap arrangement was worked out wherein state-owned gas utility GAIL India was to divert gas from other sources to NTPC and supply Reliance gas to its existing customers.

 However, limitations in GAIL's pipeline capacity restricted the swap to just 1.2 mmscmd, sources said, adding that additional gas supplies to NTPC would begin by next week.

 NTPC's Anta plant in the national capital region currently gets 0.61 mmscmd of KG-D6 gas.  Sources said the state-run utility does not want to use KG-D6 gas at its Kawas and Gandhar plants as it is seeking RIL gas for expansion projects at the two sites at the price of USD 2.34 per mmBtu that Mukesh Ambani-firm had committed in a 2004 tender. 

Source: PTI

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Pricing, infrastructure hold key to oil growth

In 2009-10, India’s oil and gas production is projected to increase significantly — oil by 9.5 per cent and gas by 53 per cent over the previous year.

Oil production has risen after the commencement of crude oil production from Rajasthan, KG offshore and improved oil recovery projects by national oil companies. However, gas production has gone up because of the commercialisation of a large gas discovery in KG offshore and coal bed methane projects.

This year has been a landmark year for the additional production of oil and gas in India. This increase in production will help reduce the country’s dependence on imported oil, which will result in savings of foreign exchange, overcoming the gas supply deficit in industries and establishing greenfield gas-based projects. This will lead to higher economic development and an increase in GDP growth.

To optimise the utilisation of natural gas in the country, the government is planning to promote the development of a nationwide gas grid on the pattern of national highways. This will help connect various sources of natural gas to different demand centres all over the country. The laying of a natural gas pipeline network will help in the growth of gas-based industries, which, in turn, will spur economic development.

Further, the Petroleum and Natural Gas Regulatory Board has identified over 300 cities for city gas distribution projects. The common man will stand to gain substantially from the expansion of city gas networks because of the proposed provision of piped natural gas to households and compressed natural gas for vehicles at a reduced cost. The enhanced availability of PNG/CNG will, in turn, help in improving public health and the quality of life by ensuring a cleaner environment.

To enhance the availability of right quality and quantity of petroleum products, the government-approved Vision 2015 in June 2009 aimed at expanding the marketing network as well as the quality of the products and services, especially in the rural areas.

National oil marketing companies have launched a six-digit toll-free complaint number. A facility to book LPG through SMS and get timely information about delivery status were also launched in August. To contain the menace of adulteration, state-owned oil marketers have started automated retail outlets through advanced information and technology solutions such as monitoring the movement of tank trucks through global positioning system and third party certification of retail outlets.

A dedicated scheme called Rajiv Gandhi Gramin LPG Vitrak Yojna was launched in October 2009 with a view to increasing the reach of LPG in the rural areas. This will help the rural population gain access to clean cooking fuel. Vision 2015 envisages the increase in population coverage of LPG access to 75 per cent from 50 per cent of the population.

As part of its community welfare measures, the government has enhanced the corporate social responsibility (CSR) funds of the oil PSUs to at least 2 per cent of net profit of the previous year for community development or welfare. The CSR activities include education, health and medical care, providing clean drinking water besides rising to the occasion in times of national calamities.

Key challenges

The Indian oil and gas sector faces challenges in enhancing production, meeting increasing demand, providing petroleum products at affordable prices, enabling the creation of a level-playing field to both public and private players, bringing in a transparent and fair regulatory mechanism and meeting investment requirements towards pipelines, CGD networks and the modernisation of old refineries.

Budget expectations

The development of the oil and gas sector leads to energy security, employment and welfare of the community. Accordingly, it is expected that the government will promote sectoral development through a transparent and market determined pricing mechanism, incentivising investments and providing tax holidays in establishing new infrastructure such as pipelines and LNG terminals, oil and gas production and simplifying the tax regime for service providers.

Source: The Telegraph

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RIL’s Nagothane petrochemical manufacturing unit wins ‘Excellence in Practice’ award from ASTD

American Society for Training and Development (ASTD) has honored the Reliance Industries Ltd’s (RIL) Nagothane petrochemical manufacturing unit ‘Excellence in Practice’ to achieve world-class safety in plant operation. Board of Directors of ASTD, which is the world’s largest association dedicated to workplace learning and performance professionals, will honor the team of Nagothane Manufacturing Division during its international conference and exposition on May 10, 2010.

RIL’s Nagothane petrochemical manufacturing division had initiated the practice of 'Empowering Employees with Knowledge, to attain the safety in plant operation. The practice initiated by the RIL’s Nagothane Manufacturing Division clearly attracted the ASTD, which has members from more than 100 countries who work in thousands of organizations of all sizes. The practice has been selected for the ASTD honour on account of clear demonstration and measurable results of achieving organizational goals, strong evaluation plan and appropriate design values.

The ASTD award is a testimony of demonstration of sincere efforts of RIL’s Nagothane manufacturing unit employees, in line with RIL's mission of achieving excellence in workplace and its operations. Indirectly, the ASTD has recognised RIL’s practice of relating learning to workplace safety performance through enterprise-wide awareness.
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Fuel price rise likely after budget, says finance ministry

The finance ministry has advocated an increase in auto and cooking fuel prices only after the Budget is tabled in Parliament on February 26 in an effort to avert possible united protests from the United Progressive Alliance’s non-Congress allies and opposition parties ahead of a busy opening week of Parliament.

Parliament opens on February 22 and the first week will see the presentation of the Economic Survey and two Budgets (Railway and general).

Although the Congress has conceded that a price rise is inevitable given the rising subsidy the government is paying state-owned oil companies to sell fuel below market price, the final decision on the issue will be taken by Prime Minister Manmohan Singh and Congress president Sonia Gandhi.

The thinking goes that the second general budget of the UPA’s second term is likely to contain sops for the aam aadmi, and these could provide a cushioning effect before the harsh political decision for a fuel price rise is announced.

Apart from managing the political consensus within the UPA, the government is concerned that the inflationary impact of a fuel price rise may also raise strong opposition protest. Petroleum products as a group have a weight of 14.2 per cent in the wholesale price index.

The issue of raising auto and cooking fuel prices came up two weeks ago after an expert group on petroleum pricing headed by Kirit Parikh had suggested market pricing for auto fuels, a Rs 100 per cylinder increase for LPG and a Rs 6 a litre for kerosene .

Though petroleum minister Murli Deora had earlier said the committee’s report would be presented to Cabinet, the issue did not come up for discussion in last week’s Cabinet meeting and is not on tomorrow’s agenda either.

“No decision on the announcement of a fuel price hike has been taken,” a top finance ministry official told Business Standard on Tuesday.

The ruling Congress is yet to get the endorsement of key allies in the second UPA — Mamata Banerjee’s Trinamool Congress and M Karunanidhi’s Dravida Munnetrak Kazhagam (DMK) with 17 and 19 Lok Sabha MPs respectively — on this issue.

Both parties have threatened protests against any move to raise oil prices given current levels of inflation. Deora, however, has already discussed the issue with other UPA constituents.

A UPA manager also pointed out that Parliament is about to start and the Economic Survey and the general and the railway budgets need to be tabled in the first few days. If the fuel price hike is announced now it might unite the entire opposition against the government from the very beginning.

Deora met Finance Minister Pranab Mukherjee last Sunday on the issue but failed to reach a consensus.

Deora also wanted the finance ministry to help meet the Rs 31,574 crore loss of Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) for selling LPG and kerosene at subsidised prices. The finance ministry has so far committed only a Rs 12,000 crore cash subsidy.

Public sector oil distribution companies have projected a loss of Rs 45,570 crore on selling petrol, diesel, domestic LPG and kerosene below market prices.

The state-owned oil marketing companies are losing Rs 4.63 a litre on petrol, Rs 1.89 a litre on diesel, Rs 18.06 per litre of kerosene and Rs 287.59 on every domestic LPG cylinder.

Source: Business Standard

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Fuel For Thought

The impact of the recommendations of the expert group on pricing of petrol, diesel, kerosene and LPG on the poor and on the price level should be no more than that of present policy and most likely smaller over time. The group has recommended freeing petrol and diesel prices and some increases in prices of kerosene and LPG. 

India imports 80 per cent of the petroleum consumed. When crude price increase is not passed through to consumers, the cost will have to be borne by oil marketing companies (OMCs). Since private OMCs would get out of a business if they made losses, it would be left to public sector OMCs to supply petroleum products at prices below their costs. If the OMCs are asked to bear the losses, they would go bankrupt. This would seriously compromise our energy security. Under-recoveries of OMCs are at Rs 46,000 crore in 2009-10. 

The government can finance OMCs by raising taxes, cutting down expenditures, borrowing from the market or printing money. All these have consequences for price levels and economic growth, both of which affect people's real incomes. 

The 2009-10 budget expects a total tax revenue of Rs 6,40,000 crore, of which Rs 2,65,000 crore are to be from indirect taxes. If indirect taxes are raised, the burden falls on people and the poor bear a larger burden relative to their income because indirect taxes are generally not progressive since progressive taxes collect little revenue. While income tax can be progressive, raising an additional Rs 30,000 crore over the estimated amount of Rs 1,07,000 crore will raise the tax rate by some 30 per cent and a tax at a high rate often gets evaded. The burden of corporate tax, expected to generate Rs 2,57,000 crore, may also fall in part on consumers in the form of higher prices. 

If under-recoveries are financed through expenditure cuts such as lower investment in irrigation or reduced outlays on the programmes of Bharat Nirman, the burden also falls on the poor. 

If deficit financing through market borrowing is done, interest rates, borrowing costs and production costs increase and investments go down. The country's credit rating also goes down with a higher fiscal deficit, and the costs of international borrowing increase. This raises prices also. Issuing bonds to PSUs is really financing by borrowing money. Printing money would have a direct inflationary impact. 

Thus, no matter what you do or do not do, domestic prices will be impacted. The expert group recommendations should be examined in this context. 

Freeing petrol price is a no-brainer, as vehicle owners need no subsidy. Also petrol consumption has little impact on other prices. With full pass through even at a crude price of $80 per barrel, an average two-wheeler driver would spend around Rs 50 per month more. 

Consumers of diesel are passenger cars at 15 per cent, agriculture 12 per cent, trucks 37 per cent, buses 12 per cent, industry 10 per cent, power generators 8 per cent and railways 6 per cent. The owners of diesel cars, many of which are SUVs, can afford to pay more. 

The Commission on Agricultural Costs and Prices while fixing minimum support prices compensates farmers for the cost of diesel. Thus, a higher price of diesel puts no additional burden on farmers, encourages them to use diesel and water more efficiently and reduces over-exploitation of groundwater. 

Immediate increase in diesel price would be around Rs 2.5 per litre. Use by trucks, buses, railways, power generation and industry would increase costs but the impact on prices would be moderated as the higher diesel price would encourage freight movement by more fuel-efficient railways and competitive pressures. Thus the impact is not likely to be more than that of not changing present policies. 

Kerosene price was set in 2002 at Rs 9 per litre. A lot of PDS kerosene gets diverted to adulterate diesel and for smuggling to neighbouring countries where the price is thrice as high. Households in the poorest decile in rural areas, which use 3.5 litres of kerosene per month, spend 2 per cent of their total expenditure on kerosene. The suggested increase puts no larger burden on the consumer budget than in 2002. 

An increase of Rs 100 per LPG cylinder still leaves a subsidy of Rs 185. Sixty per cent of the LPG subsidy accrues to the richest 30 per cent of the population. The poorest 40 per cent in rural areas get only 0.6 per cent. The suggested price increase is less than the increase in per capita income of the urban population. Rationing to six cylinders per year would have meant a similar financial burden, encouraged an inspector raj and not curbed diversion. 

The burden of our recommendations falls on users of petroleum products and not on the general public that bears the burden of inflation caused by present policies of managed prices. If inflation is its concern, the government can free petrol and diesel prices without increasing prices by reducing excise rates. 

Source: http://timesofindia.indiatimes.com

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OilMin preparing Cabinet note for 44% rise in APM gas

The Union petroleum ministry is ready to take the issue of price revision in administered price mechanism (APM) gas to the Union Cabinet, with a recommendation for a 44 per cent increase in the price, retrospective from April 1, 2009.

This would benefit government-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd. The proposed rise in the price of natural gas sold under the APM by these companies would take it to $2.6 per million British thermal unit (mBtu).

The ministries of fertiliser and power have, however, opposed any price hike in APM gas. The two sectors together account for 75 per cent of APM gas consumption. "We have received comments from the ministries concerned and a final note for the approval of the Cabinet will be sent," said a petroleum ministry official. The APM gas price hasn’t been raised since July 2005, when it was increased by 20 per cent.

The increase would mean an increased fertiliser subsidy burden. The retail prices of fertiliser are capped by the government and any increase in input cost is offset as subsidy. The difference between cost and the maximum retail price (MRP) is released as fertiliser subsidy to manufacturers and importers. The fertiliser subsidy from April till mid-November of 2009 was Rs 38,760 crore. In case of power, thoughm any increase in input can be passed on to consumers.

According to the draft note, the petroleum ministry is proposing a price of $2.6 per mBtu, against $1.8 per mBtu now. The gas produced from Reliance Industries Ltd's KG-D6 field, allotted to it under the New Exploration and Licensing Policy (Nelp), is sold at a base price of $4.2 per mBtu.

ONGC incurred an underrecovery of Rs 4,745 crore during 2008-09 on its gas revenues of Rs 5,800 crore. The proposed increase will help ONGC in cutting its losses. 

APM gas is produced from the ‘nominated’ fields, allotted (to government companies) before introduction of the Nelp in 1999.

At 45 million standard cubic metres a day (mscmd), APM gas currently accounts for over 34 per cent of the country’s 130 mscmd gas availability (which includes the latest production from Reliance Industries’ Krishna-Godavari basin). However, the share of APM gas in total availability has been falling gradually.

Source: Business Standard

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This is a good time to move to market prices for petrol & diesel'

With the government dithering over raising auto fuel prices, Kirit S Parikh, who chaired a committee that recently submitted a report recommending market- and income-linked pricing for auto and cooking fuels respectively, says this is the opportune time to do so and suggests using taxation as a tool to moderate the rise. Excerpts from an interview with Jyoti Mukul & Ajay Modi.

The integrated energy policy (IEP), framed by a committee under you, also went into the issue of petroleum pricing among other things and suggested moving to market pricing. The latest committee and similarly numerous other committees had a similar view but do you think there is a political will to implement market pricing?

The idea of political will has been created and picked up by the media. We are not running a dictatorship. It is a multi-party democracy with a coalition government, for which you have to carry broad consensus. See what has happened in the case of Bt brinjal. There is still a public voice that has to be carried through.

As far as the IEP is concerned, the committee’s report came out in 2006, it was accepted by the Cabinet in 2008. The situation in the last few years has been extremely volatile. If you had not gone for free market prices in 2005 and 2006, it became extremely difficult to do it in 2007 and 2008, when oil prices were very high. I believe today is the opportune time to move to market prices. Prices can be adjusted now. The government can even temporarily cut taxes.

To move to free markets, if you need to adjust prices of petrol by Rs 6, and if you feel that it is possible to raise prices without too much public outcry by Rs 4, then cut duty by Rs 2. You can do the same thing for diesel, so that the immediate increase in price would be small.

Is there any difference between the IEP and the present committee’s recommendations on petroleum pricing?

In IEP, it was suggested that prices be market-driven and competitive. It also said there should not be much difference between taxes on different fuels. If you have any other objective like environment, then you can have different taxes.

In most countries, the price difference between diesel and petrol is very small. In India, the price difference is Rs 15. There should be a uniform duty but since petrol is one-fifth of diesel consumption, you can lower the duty on petrol by 80 per cent and increase the duty on diesel by 20 per cent.

While this is a more rational thing to do, we have suggested a Rs 80,000 excise duty on diesel vehicles. If I raise the price of diesel, everybody pays a higher price — truckers, industry, railways, farmers — and that would increase the cost of transport. Whereas the price of diesel for owners of cars and SUVs is a personal cost. It is a question of acceptability. We are taxing petrol more because it is a tax on luxury. The same argument applies to diesel-driven passenger vehicles.

Automobile makers have questioned the flat rate of Rs 80,000 on diesel vehicles on the ground that small cars should not pay the same tax as luxury diesel cars. What are your views on this?

I am willing to accept that. I am completely flexible. We have given a formula. It can be calculated on the basis of a particular category of car. We have calculated on the basis of a petrol car running an average 8,000 km per year. You can calculate on the basis of that particular car on the average mileage.

The government appears to be willing to accept the recommendations of the committee only partially. Will this yield any result?

We are not saying do it tomorrow. The report recommendations are in two parts. One deals with petrol and diesel. If the government accepts petrol and diesel prices as market-driven, it will be an important decision. Excise adjustment is a very good way of achieving this. Consumption has to be checked. It is important to raise prices for efficiency in transportation. Whether you should tax diesel cars or not is a separate and independent issue. There is an anomaly that needs to be addressed.

If our recommendation on LPG and kerosene is not accepted at all, instead of our saying that the government will pay Rs 20,000 crore as subsidy, it will have to pay Rs 35,000 crore from the budget. That is the government’s choice.

Then, take our recommendations on the subsidy-sharing by upstream companies.We think we need a strong and viable upstream industry for our energy security. We have suggested that upstream companies should pay tax on only that portion of production that is from blocks allotted on nomination basis.

Why have you left out companies that have been allotted blocks under the New Exploration and Licensing Policy (NELP), and also pre-NELP since they also get the benefit of an increase in oil prices?

The NELP mechanism is different. For instance, Reliance Industries Ltd (RIL) is allowed to write off expenses from its revenue and when expenses are covered, sharing begins. Sharing increases as the proportion of profit increases. If the price increases, RIL will write off its expenses earlier. The government starts getting a large share earlier. There is no question of government not getting a higher share in these blocks.

When the subsidy burden of upstream companies goes down, the government’s share goes up. How do you think this can be addressed?

Everybody agrees that whatever subsidy the government wants to give on kerosene and LPG should ideally be given out of the government budget. The logical thing is to tell the government, either you raise the prices or give it from the budget.

What would you suggest, bonds or direct subsidy?

Whether it is bonds or cash, they do not come on time and the whole mechanism does not work. Oil marketing companies (OMCs) end up borrowing in the short term and end up spending on interest rates. It would certainly impact OMCs’ finances. The monetisation of bonds is already happening. It is below the budget. Bonds are only window dressing. If you want healthy oil companies in the country and 80 per cent of your need is imported, there is no choice whatsoever but to pass on the price to oil companies. On those products for which the government does not want to transfer the burden, it should come out with a clear and transparent way of subsidising.

The committee has suggested eventual phasing out of subsidised price and instead giving direct subsidy either through vouchers or a smart card system that works on unique identification number (UID). How feasible is this?

Personally, I feel food vouchers or petrol vouchers can work. But, people say there is always a danger of faking vouchers. If you have a UID system, then there will be a random number given to individuals but the catch will be in the fingerprint. The idea is that a person can go to any shop, give his fingerprint and if he has a smart card, he can buy at market price, with the remaining amount being automatically transferred from the central government to that of the shopkeeper. Nobody else can transfer this money and leakages can be eliminated. Smart cards can be distributed in a transparent manner. The same thing can be done for LPG.

You have said that LPG is a merit good but you have not suggested anything to promote its use.
The Chaturvedi panel suggested six subsidised cylinders could be given every year. At the current level of Rs 285 a cylinder subsidy, a consumer will have to pay Rs 1,140 extra for four cylinders in a year which comes to Rs 100 extra if a family consumes 10 cylinders. We have also recommended the same burden but in a simpler manner. The subsidy on LPG is very large. After our recommendations, there will still be Rs 185 a cylinder subsidy. If I have a smart card, I will give subsidy but there will be better targeting.

The committee has also suggested adequate regulatory oversight but we have a situation in which the government wants to curb the powers of the regulator by saying that pricing is a policy issue and the Petroleum and Natural Gas Regulatory Board should not decide it. What are your views? Price should not be fixed by anybody. The government should also not be deciding prices. It is not a policy issue. Price should be decided by the market. We need to have a Competition Commission of India kind of regulation for the sector. There should be no cartelisation or monopoly pricing. The regulator has a role to play. State-owned companies are using sarkari power to undercut private companies. That’s wrong. The regulatory board should be looking at this issue and ensuring that a competitive market prevails. If there is market pricing, nobody will have monopoly power.

Source: Business Standard

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