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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