No need for CAG audit of CBM blocks, says Rangarajan panel

In the wake of a row over Comptroller and Auditor General ( CAG) audit of Reliance Industries Ltd’s (RIL’s) KG-D6 block, a panel headed by Prime Minister’s Economic Advisory Council Chairman C Rangarajan has said CAG need not audit RIL’s coal-bed methane (CBM) blocks, as those were governed by a different contractual regime.

The panel said in its report last week that CBM blocks did not have elements of cost recovery, so a CAG audit “may not be required”.

In conventional oil and gas blocks, such as the eastern offshore KG-D6, companies are allowed to first recover their cost before the government gets a share in profit. CAG had earlier criticised this cost-recovery model and said it encouraged operators to keep raising costs to defer government profit.
However, the government had bid out CBM blocks, for extraction of gas from coal seams, on the basis of output share a company offered from the first day of production. A block was given out to the company offering the highest share.

“As the element of cost recovery is not applicable to CBM blocks and nominated (oil and gas) blocks (given to ONGC and OIL), CAG audit for such blocks may not be required, and production monitoring through field surveillance might be considered adequate,” the panel said in its report.

RIL, which has over the past few months bickered over the scope of a second round of audit of its spending on the flagging KG-D6 fields, has two CBM blocks in Sohagpur, Madhya Pradesh, for which it has been seeking a price of almost $13 per million British thermal unit.

Even for conventional oil and gas blocks, the panel said, CAG should carry out audit “with a period of two years” of closing of annual accounts.

RIL had contended that the government can appoint an auditor, including CAG, to verify its expenses within two years of the spendings, as had been provided in the production-sharing contract (PSC). Last month, it agreed to allow CAG to carry out scrutiny for 2008-09 and 2009-10, though it was time-barred.

“Audit by CAG may be carried out within a period of two years of the financial year under audit, as specified in PSCs,” the Rangarajan panel said. “Further, where investment is huge (a $1 billion threshold may be adopted), a suitable mechanism of concurrent audit may be considered,” it added.

It upheld RIL’s contention that CAG audit should be in line with Section 1.9 of the PSC that provides for only a financial scrutiny and not a commentative performance audit that can question technical decisions.

“Audit by CAG under Section 1.9 of the PSC should be prior to performance audit of the (petroleum) ministry, so that corrective actions emerging from CAG audit could be taken by the government in order to protect the government revenue,” it added.

Source: PTI

India seeks more oil, gas from Nigeria

Union Minister for Petroleum and Natural Gas Murli Deora on Thursday said Africa's largest crude oil and gas producer — Nigeria — was willing to increase oil exports to India besides liquefied natural gas (LNG).

“Nigeria is our close friend and willing to help us in meeting our growing energy requirements. This is a positive development for securing India's energy security,'' Mr. Deora said. He recently had a meeting with Nigerian President's special adviser Emmanuel O. Egbogah.

Mr. Deora said that during his meeting, he took up the issue of GAIL (India) and Petronet LNG picking up stake in the $8-billion LNG project at Brass in the Niger delta. “We expressed interest in sourcing LNG on long-term contract from Nigeria and discussed the possibility of GAIL and Petronet joining in a LNG project,'' Mr. Deora remarked.

State-run Nigeria National Petroleum Corp has a 49 per cent stake in the Brass project. French energy major Total, Eni of Italy and ConocoPhillips hold 17 per cent stake each. India wants additional Nigerian crude, Petroleum Secretary S. Sundareshan said. “Mr. Emanuel responded positively and said the Indian side should send a formal proposal to the Nigerian Government in this regard. We will be moving in this direction soon,'' Mr. Deora said. India's energy demand is expected to increase by over 40 per cent during the next decade but supply from its ageing oil-fields is expected to increase by around 12 per cent necessitating higher import of oil and gas assets abroad, he said. India wants to increase its crude oil import from Nigeria, which plans to raise its production to 4 million barrels from 2.7 million barrels a day by 2012. India imports around 13 million tonnes of crude oil from Nigeria annually.

Nigeria is the largest crude oil producer in Africa. Nigerian crude oil is light and sweet and commands a premium in the international market due to its quality.

Source: The Hindu

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Government’s fertiliser bill to increase

The government’s decision to do away with the current differential gas pricing in the Indian market by doubling the price of gas under the Administered Price Mechanism (APM) may add an estimated Rs 2400 crore to the Centre’s subsidy bill. 

APM gas is currently supplied at a concessional rate to the fertiliser sector on priority. “This will only be pass-through for gas-based urea manufacturing companies.“ Sudip Sural, Head, Corporate Rating, CRISIL, said. 

Since urea is the only controlled fertiliser at present, the additional spend in differential between its actual manufacturing cost and the retail price is borne by the government and not by the industry. 

But the move has raised apprehensions in the fertiliser sector, especially since APM gas meets 45% of the total gas needs of the sector. 

This year, infact, additional availability of APM compared to earlier has even meant that some fertcos had to pay penalty to Reliance Gas for taking contracted, but more expensive, supplies. “We preferred to use all the APM gas available because it was much cheaper,” one company official said. 

While the industry fears bigger problems on timely recovery of subsidy from the Centre in the short term, it perceives high and market-linked gas price pushing up urea production costs inordinately in a deregulated environment two years or more later. 

Industry sees pricing APM gas same as Reliance gas as signalling the new benchmark price for all gas, irrespective of source. This would boost input prices for urea manufacture and increase industry problems in reclaiming the subsidy or concession. 

“At any given time, several months worth of subsidy payments due to industry are stuck in the government’s pipeline. The Centre has been unable to clear all the dues to industry in the running fiscal for the last three years and has carried over huge amounts into the next year’s subsidy bill,” an industry expert said. 

The long term worry for the industry is the impact of the gas price hike in a de-regulated environment. An official from a cooperative fertiliser company who did not want to be quoted said “The hike in gas price remains pass-through only as long as ours is a regulated sector. There is no saying how much longer it will remain so. Once it becomes fully de-regulated two or so years down the line, benchmark market-linked gas price will account for a big part of urea production costs and sharply heighten competition among fertiliser companies.” 

Natural gas is used as a feedstock in urea manufacturing. Of the total urea production costs, gas price (APM and other sources) accounts for an estimated 70%. Urea manufacturing cost for for pre-92 gas based plants, at prevailing APM gas price, is estimated at Rs 5600/tonne. 

For mixed feedstock plants, costs are an estimated Rs 7000/tonne. However, urea is currently retailed at a controlled rate of Rs 4830/tonne, with the Centre picking up the difference.

Source: Economic Times

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Sliding along on oil

UPA-II seems to have finally discovered a sense of humour, and a wicked one at that. With the Kirit Parikh report in place, the pink papers were busy speculating that the question was no longer “when” but by “how much” the prices of at least petrol and diesel would be raised. The report, appearing just before the budget, made a strong case for moving end-user prices of petroleum products in line with international trends. With the marketing companies reporting under-recoveries Rs 3.10 on each litre of petrol, Rs 2.55 on diesel, Rs 17.30 on kerosene and Rs 241 on each cylinder of domestic LPG (all December prices) the bill for the year FY 2009-10 was estimated to be Rs 45,500 crore. Of this, the government itself will be providing a mere Rs 12,000 crore. “Upstream” companies — GAIL, ONGC, and OIL — will pitch in with about Rs 11,000 crore; the oil marketing companies will absorb the remaining Rs 23,000 crore. 

Consequently, the Parikh Committee argued that the current pricing non-regime had decimated any cash surplus available with downstream as well as upstream companies. The latter were being forced to dole out ad hoc price discounts on crude supplied, thereby reducing funds for investment in domestic and overseas exploration. With a frightfully wilful compensation mechanism, the companies found it difficult to plan any investments. India is one of the few countries where the government neither provided for all the subsidy nor allowed end-prices to be passed on to consumers. It therefore had no option but to pass it on, or to provide for the under-recoveries of the state-owned marketing companies that, following the pricing non-regime, were the only ones left selling liquid fuels in the domestic market anyway.   

The Finance Bill pulled a fast one. It cheekily left actual prices untouched but raised the excise duty on both petrol and diesel. It restored the customs duty on both products to June 2008 levels, making it 7.5 per cent instead of the existing 2.5 per cent and slapping on an additional Re 1 per litre excise duty for good measure. Simultaneously, it also imposed a 5 per cent duty on crude imports. What’s important is that even as it leaves the oil companies’ bleeding balance sheets unattended, this garners Rs 30,000 crore more for the government in FY 2010-11. Therefore the shadow boxing being done by UPA’s friends and foes for a rollback of “prices” actually lacks a killer punch — simply because what they are demanding is not so much a rollback of prices but one of taxes meant to collect revenues for the UPA’s flagship social sector schemes. So when the PM and the FM declare there is going to be no rollback, they can do so with a moral authority lacking on the other side. Had they actually raised prices that would have not been the case. So the UPA has the last laugh on this one.  

What the additional Rs 30,000 crore also does is that it gives the government headroom to manoeuvre in case crude oil prices were to head north again. Duties can in that case be re-jigged without affecting end prices and oil companies just about kept afloat. With no allocation proposed, all it means is that the finance ministry will continue to make ad hoc cash allocations to partially finance under-recoveries. Pushed to the wall, it may yet go in for more oil bonds. So it is going to be business as usual for some more time.  

For the sake of record, the finance minister has indeed said that a decision will be taken to implement the Kirit Parikh report in “due course”. Petroleum Minister Murli Deora also continues to indicate that a decision on the report will be taken soon. However, given the vociferous walk-out in Parliament and the allies’ histrionics, the government is unlikely to have the stomach to further mark-up petrol and diesel prices to the market — and increase the price of  kerosene by Rs 6 a litre and LPG by Rs 100 as recommended by the Parikh Committee. 

With no provision being made for “oil bonds” as a compensation mechanism and cash subsidies remaining at earlier levels, the policy message on the oil and gas front is clear: the government remains unconvinced by the Rangarajans, Chaturvedis and Parikhs. The allocation column under “Compensation to oil companies for under- recoveries on account of sale of sensitive petroleum products” in 2010-11 is marked “nil”. Reforms in the oil and gas sector are not the immediate priority. Oil companies, both public and private, should they have surpluses which remain uncollected, are advised to sequester them in war chests for better opportunities overseas. 

Source: http://www.indianexpress.com/news/sliding-along-on-oil/586663/0


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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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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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Petro Ministry pressing for deregulating fuel prices

The Petroleum Ministry is pushing for freeing petrol and diesel prices from government control and is awaiting political consensus on the issue to implement it.

The ministry is also proposing a marginal hike in domestic LPG and kerosene prices, ministry sources said.

If implemented, petrol and diesel prices would be changed on the first of every month based on the average international price in the preceding 30 days.

Source: Economic Times

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Srivastava settles in at DGH

Many believe it’s only a matter of time before SK Srivastava (left) is formally appointed new director general at the DGH to replace VK Sibal. PETROWATCH learns the 55-year old interim DG was the “unanimous choice” of the cabinet secretary-led selection committee during interviews on January 28. Others interviewed were: S. Rath from Oil India; J. Vijay Kumar, A. Verma and AK Mitra from ONGC. NK Verma (ONGC) was shortlisted but did not turn up. 

Contacted by this report, Srivastava shrugs off any congratulations with a laugh. “I appeared for the interview,” he said. “Results have yet to come!” Srivastava has been acting DGH chief since last November and was deputy director general between August 2007 and September 30, 2009. “Srivastava received vigilance clearance in October when he took over as Oil India director operations,” says a well wisher. “His formal appointment should come before April

Source: Petrowatch

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Oil min seeks more tax relief for pipeline biz

The petroleum ministry has asked for enhanced tax relief for companies laying and operating cross-country petroleum pipelines.

Currently, the government allows these companies to deduct their entire capital expenditure made for laying and operating pipelines the previous year, while computing their taxable income if they reserve a third of the capacity for outsiders. The petroleum ministry has now told the finance ministry that the investors in cross-country pipelines should be allowed to reserve one fourth of their transportation capacity to outsiders (which means more tax relief), said a person privy to the development.

The oil ministry has also recommended that companies doing research in petroleum and alternate fuels like condensed natural gas, ethanol and hydrogen should be allowed duty-free import of research equipment and chemicals. Besides, they should also be given excise exemption when these items are sourced locally.

The oil ministry wants the finance ministry to amend the Income Tax Act so that the third-party usage norm for cross-country gas pipelines is the same as the norm prescribed by the downstream regulator, petroleum and Natural Gas Regulatory Board (PNGRB). The regulator maintains that one-fourth capacity of crude and petroleum products pipeline should be left for third party use.

For natural gas pipeline operators, the regulator’s third party use requirement is one third of capacity. Cost of acquiring land, goodwill or any financial instrument is not allowed to be included in the capital spending.

Access to transportation facility for entities other than the pipeline owner and associates is provided at the tariff fixed by the regulator because it is not feasible to let more than one entity to lay pipelines to serve one geographic region. Such access is to be given in a non-discriminatory way.

The oil ministry has also recommended that companies doing research in petroleum and alternate fuels like condensed natural gas, ethanol and hydrogen should be allowed to import research equipment and chemicals duty free. Besides, they should also be given excise exemption when these items are sourced locally. The petroleum ministry has also asked the finance ministry to scrap the duty of Rs 50 a metric tonne levied on locally produced and imported crude oil to raise funds for relief work in calamity struck areas. Domestic crude also attracts a Rs 2,500 a metric tonne cess, but no excise duty.

Senior finance ministry officials told FE that while the ministry may be willing to make small concessions to the sector, significant sops like giving infrastructure status and the accompanying ten year income tax holiday to the entire hydrocarbon exploration and production activities is not possible. The petroleum ministry is, however, making a compelling case for it. Now income tax sops are available for different segments in the industry—tax holiday for mineral oil refiners (but not beyond 2012) and for those laying cross-country pipelines.

The petroleum ministry also wants the finance ministry to step up the direct subsidy component from union budget for kerosene and domestic LPG when it extends the scheme beyond March 31, 2010. Now the budget subsidy on kerosene and domestic LPG is a small part of the entire subsidy to these products, which are met partly through discounts from producers and partly through issue of oil bonds to retailers. Stepping up direct subsidy would enhance transparency in government accounts and reduce the requirement of oil bonds to state-run retailers, said a government official, who asked not to be named.

Source: Financial Express

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Time to think of gas-based UMPPs

The government’s ultra mega power project (UMPP) scheme has proved a big hit among investors. However, this effort alone would not go far enough in meeting the country’s growing power shortage. With natural gas availability from domestic sources improving significantly in recent years, the government needs to think of a gas-based UMPP scheme if it is to effectively deal with the country’s power problems. In any case, cost economics of gas-fired power projects near load centres compares well with imported coal-fired power plants set up at coastal locations.

India has faced huge shortfalls in its envisaged power generation targets for every Five Year Plan. In view of that, the government has launched the ultra mega power project (UMPP) policy to accelerate the country’s coal-based capacity addition pace. The government has successfully bid out four UMPPs so far and more are in the pipeline.

The government has also envisaged tapping renewable energy sources like solar, wind, bio-mass as well as nuclear to overcome the country’s electricity shortage. However, the cost of generating electricity from these sources works out much higher compared to fossil fuel-generated power because of high capital cost. So the government will have to make huge subsidy payouts to support renewable power generation capacity addition. In any case, these are not appropriate sources for meeting peak power requirement.

Cost economics apart, these efforts might not be enough in bridging India’s power demand-supply gap. India’s power requirement is rising at a much faster pace than the official projection. Global consultancy firm McKinsey has said that if India continues to grow at an average rate of 8%, the country’s demand for power will soar to 315-335 gigawatt (gw) by 2017, a projection that is 100 gw higher than the estimates put out by the Planning Commission. To meet the country’s projected electricity demand, McKinsey has suggested that India focus on setting up peaking power sources like hydro and gas-based power plants.

Although India has the potential to develop 1,48,700 mw of hydro-based power generation capacity, there are serious geological and technological constraints in harnessing country’s hydro resources. Most of the hydropower projects face delays because of hydrological and geological uncertainties involved in their execution. India has so far harnessed only 20% of its hydrogenation potential.

Natural gas availability from domestic sources has significantly improved in recent years. Additional 80 million standard cubic meter per day (mmscmd) of gas became available from Reliance Industries Ltd’s (RIL) D6 block in the Krishna-Godavari basin. Gujarat State Petroleum Corporation (GSPC) also plans to begin production from its Deendayal gas field in 2012. GSPC expects production of 200-300 million metric cubic feet a day (mmscfd) from the block. Meanwhile, exploration work is on in the KG basin and more discoveries are likely to be made in days ahead.

At current market prices, cost economics of gas-fired power projects near load centres compares well with those in coastal areas based on imported coal. For example, electricity tariff for a power plant at coastal location based on imported coal works out to Rs. 3.5 per unit. A gas-based power plant near load centre will be able to compete with an imported coal-fired power project if it can procure gas at a price in the rage of $7 million British thermal unit (mBtu). Significantly, delivered market price of domestic gas available from RIL’s D6 works out to $6-7 per mmBtu.

Not only in terms of generation cost economics, gas-based UMPPs also compare favourably with imported coal-fired UMPPs in respect of transmission losses. Gas-fired UMPPs’ transmission losses would work out much lower compared to coal-based UMPPs set up at coastal locations because of their proximity to load centres. By a rough estimate, transmission losses for these coastal plants would be in the range of 18-20%. In comparison, transmission losses for gas-based UMPPs should be about 80% lower.

Capacity addition and cost considerations aside, increasing share of natural gas in power generation can also help the country in checking its fast-expanding carbon footprint. India has volunteered to make a significant reduction in its carbon emissions. Gas-based UMPPs will come in handy for India in meeting the emission cut promise.

While the government can award captive coal mines for coal-fired UMPPs, there is no such assurance for gas-based projects. That means tying up fuel linkage for a gas-based power project will take more time. So while the government can replicate other provisions of the current UMPP policy in formulation of a gas-based policy, it will have to allow a longer timeframe for completing bidding for allocation of these projects.

Carbon footprint of the Indian power sector is growing fast. Given the growing global concern against global warming, it might not be feasible for India to maintain the current share of coal-based power generation capacity in the long term. So, it is high time the government started thinking about gas-based UMPP scheme.

Source: Financial Express

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Kirit Parikh panel may pitch for freeing fuel price

Refiners' take

Private sector for subsidy through specified budgetary provision.

Changes in excise/customs duty or sales tax be passed on to the customer fully.

The Kirit Parikh panel, set up by the Centre to draft a fuel pricing policy, will press for deregulation of petrol and diesel. The report is to be submitted by this month-end.

Top industry sources told Business Line a consensus seems to have emerged that the committee would follow a line adopted by similar expert groups that advocated market-determined pricing for the two auto fuels.

Equally, going by past reactions of different governments to these proposals, it is likely that anything similar this time would end up in the archives.

The private sector, comprising Reliance, Essar and Shell, believes that any subsidy on these auto fuels is best allocated through a specified budgetary provision. This would ensure them a safety net on the lines of public sector refiners.

The refining companies also feel that the ex-storage price of these products be increased (or decreased) by 64 paise a litre for every Rs 100/barrel (increase or decrease) in international oil price. They reiterate that changes in excise/customs duty or sales tax be passed on to the customer fully though this may inflate the retail selling price.

The private players have sought a reduction in the entry barrier of Rs 2,000 crore to have a competitive market of Herfindahl-Hirschman Index.

Also called HHI, this is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Increases in the index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite.

As for losses on cooking gas and kerosene (to be squared up by the Centre through issue of oil bonds), the private players have suggested that these can be made good by floating levies on non-NELP crude. They argue that the net revenues of non-NELP producers keep increasing marginally with an increase in crude prices, even if under-recoveries of both products are compensated by non-NELP crude. Further, an increase in selling price and Government subsidy will boost the net revenues for non-NELP crude oil producers, they add.

In fact, Oil and Natural Gas Corporation has suggested to the Parikh panel that a special oil tax (SOT) or windfall tax be levied on crude oil producers if their produce fetches any price over $60 a barrel. It has also recommended that 20 per cent of the incremental price over $60 a barrel be taken as tax to subsidise petrol, diesel, LPG and kerosene while 40 per cent of anything beyond $70 can be taken as windfall tax. This could be 60 per cent for anything over $80 and 80 per cent on $90 plus a barrel.

PSUS suffer

As for the public sector refiners, the whole exercise is turning out to be farcical. In the process, they have suffered in selling fuels at unrealistic subsidies and waiting for eternity for a compensation package from the Centre. Over the last few years, ONGC, Oil India and GAIL (India), have made good the losses incurred by IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation on sale of petrol and diesel. A system of market-determined pricing for these two fuels would be the best piece of news to these companies.

Source: Business Line

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Crude oil production to go up 11pc, natural gas by 53pc: DGH

Reliance Industries and Cairn India will help increase nation's crude oil output by 11 per cent and natural gas production by 53 per cent in 2009-10, oil regulator Directorate General Hydrocarbons (DGH) said today.

Speaking at an Assocham conference, DGH Director General S K Srivastava said the country's gas production would double next year when RIL's KG-D6 fields' reach peak output.

KG-D6 field is expected to reach peak output of 80 million standard cubic meters per day by mid-2010.

Srivastava, according to an Assocham statement, said oil production from Cairn's Barmer basin field in Rajasthan is expected to contribute about 18 per cent of the country’s total oil production in near future.

India's crude oil production has been stagnant around 32 million tons for past few years and output from Barmer and KG-D6 fields would raise nation's oil production.

"...After stagnant production for over a decade, in 2009 -10 crude oil production is likely to increase by 11 per cent and natural gas by 53 per cent over previous year," he said.

Cairn's Rajasthan field is currently producing about 20,000 barrels per day while RIL is pumping out 10,000 bpd from KG-D6.

On the new discoveries, he said increased exploration would result in new discoveries by 2015-16 which would require investment to an extent of USD 25 billion.

He also said that besides conventional oil and gas, the government is actively pursuing other fossil fuel alternatives such as gas hydrates, coal bed methane (CBM) and oil shale. 

"The DGH is in the select League of Nations pursuing hard to commercialise gas production from gas Hydrates. Oil share resources are currently under evaluation," Srivastava added.

He, however, regretted that in 8th round of NELP, the Petroleum Ministry could award only 36 oil and gas blocks out of identified 70 blocks due to adversaries of global turmoil.

"Unfortunately, the Ministry will not be able to offer the unbid 34 blocks to prospective investors in the current fiscal as it requires several inter-governmental approvals which take a good deal of time," Srivastava said.

He remained non-committal by what time the unbid blocks will be awarded for oil & gas production.

Speaking on the occasion, D M Kale, Director General, ONGC Energy Centre said that his Corporation is spending Rs 10,000 crore annually to arrest 2 per cent decline in crude oil production. 

Source: PTI

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Govt may hike natural gas prices by 30%

The government may for the first time in about five years raise price of natural gas produced by state-owned firms like Oil and Natural Gas Corporation after the finance ministry and the Planning Commission backed the proposal for a 30 per cent hike.

The oil ministry has circulated a Cabinet note for raising price of gas under administered pricing mechanism (APM) from Rs 3,200 per thousand cubic meters ($1.79 per mmBtu) to Rs 4,142 per thousand cubic meters ($2.32 per mmBtu).

Price of APM, or the gas produced from fields given to ONGC and OIL on nomination basis, is proposed to be raised in stages to Rs 7,500 per thousand cubic meters or $4.2 per million British thermal unit by 2013.

"Power and fertiliser ministries are against the hike but the finance ministry and the Planning Commission are backing the proposal," a petroleum ministry official said.

"The plan will be put before the Cabinet for approval in 3-4 weeks time."

The official said the note based on the recommendation of the Tariff Commission, proposes that ONGC be paid Rs 3,875 per thousand cubic meters for the gas it produces while Rs 4,315 would be paid to OIL. Consumer price would be 10 per cent higher than this.

Consumer ministries of power and fertiliser feel that the hike would result in increase in feedstock cost but the finance ministry and Planning Commission were of the opinion that it would remove distortions in the market.

APM gas price were last revised in June 2005.

About 40 per cent of the nation's 140 million standard cubic meters a day of gas output is sold at administered price. And hike in rates of these is an attempt to reduce distortions in a market with more than a dozen rates.

The government has set $4.2 per mmBtu as the sale price of gas from Reliance Industries' eastern offshore KG-D6 fields while the gas from BG Group-operated Panna/Mukta Tapti fields is sold at $5.73 per mmBtu.

State-owned ONGC lost a whopping Rs 4,745 crore (Rs 47.45 billion) in revenues on selling 17.71 billion cubic meters of natural gas at a rate below production cost in 2008-09.

"In 2008-09, our cost of production was Rs 5.87 per cubic meters. Against this our actual price realisation was just Rs 3.191 per unit," a top ONGC official said.

The proposed prices are in line with the Tariff Commission recommendation, which in 2005 suggested a producer price of Rs 3,600 per thousand cubic meters to ONGC and Rs 4,040 per thousand cubic meters to OIL. 

On top of this, the price would change by Rs 55 per thousand cubic metre for every 10 points change in Wholesale Price Index.

Based on the rise in WPI, the producer price currently comes to Rs 3,875 for ONGC and Rs 4,315 for OIL.

The rates proposed do not include royalty paid by these firms to the government.

Source: business.rediff.com 

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In oil sector, solutions can give rise to other problems

The ministry of petroleum and natural gas has been fire-fighting on one issue or the other round the year. When it wasn’t the volatility of oil prices that grabbed media attention in 2009, it was turmoil of another kind that pulled the ministry into one of the most bitterly fought corporate battles. Petroleum Secretary R S Pandey speaks to Ajay Modi and Jyoti Mukul on the “unprecedented year” and his views on market pricing and the Ambani war. Edited excerpts:

You were at the helm of policy making when the ministry witnessed the historic fluctuations (in oil prices). Was the government response has been appropriate?

Many countries’ economies were hit hard, because of high prices and by falling prices, depending on whether they were an importing or producing country. In India, a kind of balance was struck by the government to protect the interest of consumers, the oil marketing companies and the economy. The formula for charging excise duty was touched up. Some way was found to transfer funds from upstream to downstream companies. To some extent, the burden was placed also on the oil marketing companies and yet they did not go into the red. The consumers were burdened as little as possible. Unpredictability and swing of this kind placed an unanticipated burden on this sector. In retrospect, one feels the situation was managed well. A practical way was found, although it was done in an ad-hoc manner, in the absence of a long-term formula.

What are your views on market-determined pricing?

If the sector gets totally deregulated and there is volatility, prices will go up and down frequently. Deregulation will be good for the companies. But, to what extent consumers’ interest will be impacted would remain to be seen. Every problem has a solution and solutions can give rise to problems.

Many committees have already been set up to go into the issue. Is there political will to accept the recommendations, especially since we now have another committee on oil prices, under Kirit Parikh?

I have a feeling that this time the Parikh committee’s recommendation would be the basis of decisions to be taken by the government. There is a seriousness to find a way in a structured manner. We will have to wait for the report to know the future path.

The political will would certainly be to try to protect the interest of consumers. But, if a formula can be devised wherein the interest of all stakeholders are taken care of, it should be accepted. One should also remember that a major portion of the price build-up is because of the high incidence of taxes. State tax is still on an ad valorem basis, though the central government decided to change the excise duty to a specific rate. The lower the taxes, the lower would be the cost. The lower the cost of crude, the lower the cost of the product, but crude prices are so volatile: if states do not reduce taxes, the prices would remain high. The petroleum sector touches every household. The poorest of the poor depend on kerosene. The richest of the rich depend on jet fuel. Balancing all these is a challenge.

Do you agree with the view that low prices lead to inefficiency in usage?

To some extent, it is true. But, the demand for transportation fuels, i.e. petrol and diesel, is highly inelastic unless the prices become too high. It is correct to say that demand and price are linked but there is another theory in economics called elasticity of demand. We will still use our cars even if the price of petrol goes up. Bus transportation does not come to a stop if diesel prices go up. Forty per cent of petroleum products are used in transportation and the demand for transportation is highly inelastic.

In the case of cooking fuels, it depends on alternatives. In rural areas, people will switch back to firewood if LPG is priced too high. Another alternative is electricity. Consumers will choose whichever is cheap. Demand management has to be done, not necessarily through pricing but through improvement in technology and other means to promote conservation. Transportation systems in Japan or USA are much more efficient than in India. In the Gulf countries, the efficiency level is even lower.

We tried promoting efficiency through an experimental four-week campaign by PCRA last year, which has been an eye-opener. The findings point out that savings of Rs 7,000-10,000 crore is possible annually. Efficiency needs to be ensured through a mix of technological innovations, administrative and fiscal measures and, to some extent, pricing.

Perhaps natural gas does not touch people as directly as petroleum products but its prices are controlled by the government, whether produced from nominated fields or from those bid out to the private sector. Shouldn’t gas prices be decontrolled?

There is a misunderstanding. Only the price of APM gas (produced from nominated fields) is controlled, because this gas comes from fields given to government companies on a nomination basis. So, the government took a view that it should be on a cost-plus formula. In gas produced from NELP (ones that have been bid out) fields, it is not cost-plus. Under the contract, the government has the power to approve the price but it cannot approve any price it likes. The basis is ‘arm’s length’ pricing. Another name for it is market price.

The government approving the price is because the gas market is not fully developed in India and, in fact, the whole world. Crude price is the same in the world, depending on quality. But, the price of gas in the US is very different from that in Japan. The gas market is non-transparent, internationally. I am told if you put an advertisement for buying LNG, nobody will quote a price. There are only a few producers, who do not normally quote prices. These are settled through negotiations. Yet you know the price levels at various places. In India, there are four or five prices. We have talked of price formula in the PSC (production sharing contract) because gas price is linked to (that of) crude. So, we have to see what precise linkage is being provided. We have to ensure that it is not a suppressed price or an exploitative price.

For instance, the KG (Krishna-Godavari) Basin gas price is linked to crude oil. But, it is at a fixed price right now because for the last three years there has been volatility in crude prices, which went up to $147 and then went down, and the KG formula has a cap of $60. I think there is lack of education and appreciation of the PSC outside. There is a requirement for approval of the price formula but it cannot be an ad hoc approval.

Gas prices have been at the heart of the Ambani corporate war, in which the government has also been dragged in. Since you are approaching the end of your tenure, how do you look back? Was there any way of avoiding government institutions being maligned?

The two industrial houses have a place of pride in the country and have significant presence in the national economy. A dispute between them has been a matter of concern but the kind of attack and campaign the ministry saw was unprecedented. The case is sub judice, so I can’t say much. But, to answer your question, the contractor cannot enter into any contractual understanding with anybody against the PSC provisions, wherein the government has the right to regulate usage. Once the government’s right got infringed by way of a judgement, it had to go to a superior court for redressal. The private arrangement envisaged utilisation of gas from all present and future fields of Reliance Industries.

Normally, government would have nothing to do with a private dispute between two companies but here was a case where two companies had sought to utilise a national resource among themselves, without regard to the PSC and the constitutional provisions. The adverse impact of the judgement on government policies and rights and the user industries had left government no alternative. If it had been avoided, one would have been happier. It took lot of our time, created ripples, caused accusations and counter-accusations. Misinformation against the ministry had been carried out. In retrospect, I feel the government’s position has been vindicated.

There was another side to this issue which got ignored because of the controversy. India’s gas production overtook its crude oil production, but can increased production lead to higher gas demand and lower petroleum consumption?

We have to increasingly move towards a gas-based economy, as it is cheaper and cleaner than other petroleum products. Keeping in view the climate change challenges and also global availability, gas should substitute crude to the extent possible. Gas consumption is not only based on availability but also its transportation. The gas pipeline density in India is among the lowest in the world. In keeping with the growth in our economy, we have to speedily expand the pipeline network. There is a need to ensure that all demand centres are connected by pipeline for use in industry and household. There is a demand for gas but it is latent. The demand will manifest only if the pipeline is there.

Source: http://www.business-standard.com/india/news/%5Cin-oil-sector-solutions-can-give-rise-to-other-problems%5C/382651/

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Will the petroleum regulator stand up?

Much has already been written about how regulation of anti-competitive behaviour leads to increased allocative efficiencies and consumer welfare. Less, however, seems to have been written on whether the structures of regulation put in place secure these desirable ends.

This is particularly true of India where independent regulation is of relatively recent origin. It will be worthwhile to take a close look at the state of regulation in the petroleum and natural gas sector, which has been consistently in the news of late.

The petroleum sector consists of four sub-sectors, namely, exploration and production, oil refining and marketing, natural gas transportation and marketing, and crude oil and petroleum products pipelines. Of these four, the first, referred to as upstream, is supposed to be regulated by the Directorate General of Hydrocarbons (DGH), while the remaining three downstream sub-sectors fall under the domain of the Petroleum and Natural Gas Regulatory Board of India (PNGRB).

The DGH was created by a government resolution in 1993 and was posited as the regulator of the upstream sector. Nothing could be farther from the truth. It is neither independent nor a regulator. When the instrument of creation, a Ministry of Petroleum and Natural Gas order, derives its genesis from a mere resolution, rather than a statute, then independence would remain an illusory concept. The DGH operates under direct and complete administrative control of the ministry. It functions with the assistance of an advisory council and members of the council and staff of the DGH are appointed on a deputation/tenure basis by the ministry in consultation with the DGH chief. In terms of its mandate, the DGH is predominantly an advisory, rather than a regulatory, body. As per the ministry order, the DGH has been mandated to regulate only one area — preservation, upkeep and storage of data and samples pertaining to petroleum exploration, drilling, production of reservoirs et cetera and to cause the preparation of data packages for acreages on offer to companies. In all other areas relating to various aspects of exploration and production, it is only supposed to advise the ministry.

In the downstream sector, we have a genuine regulator, owing its existence to a statute and not to a mere resolution. The Petroleum and Natural Gas Regulatory Board Act was passed in 2006 and the PNGRB was notified on October 1, 2006. The PNGRB has been vested with very tangible regulatory powers and the statutory nature of its genesis gives it its independence. But despite its powers and independence, it is the ministry which seems to call the shots in the regulatory space. Before March 28, 2002, marketing and pricing of petroleum products, including transportation fuels, namely, motor spirit (MS) and high-speed diesel (HSD), was controlled by the government under a mechanism known as “Administered Price Mechanism (APM)”. The APM was dismantled by a notification on March 28, 2002. As a result, the theoretical position since October 1, 2006 is that all entities are free to price their products and the PNGRB is to regulate anti-competitive behaviour like predatory pricing. However, strangely, the government still fixes the prices of MS and HSD and the PNGRB appears to be either powerless or disinterested in doing anything about it. How can the government fix these prices now? What is the role of the PNGRB?

These issues have been examined brilliantly in a landmark judgment, dated October 5, 2009, by the Appellate Tribunal for Electricity, in appeal number 50 of 2009. The judgment, either directly or indirectly, establishes the following positions:

* Sections 11(a), 12 and 25 of the PNGRB Act, 2006, together give a wide amplitude to its duties and powers to foster fair trade and fair competition amongst the entities.

* The dismantling of the APM by the notification dated March 28, 2002 was a policy decision which has not been reversed by another policy decision. The government, therefore, cannot fix prices under the garb of policy.

* Section 2(x) of the Act specifically provides that it is only the entities which can fix the price and not the government.

* The above power given to the entities to fix the price cannot be usurped by the government.

* If the prices are to be fixed by the government as a sovereign, then it has to be declared as a public policy after observing formalities as provided under the Constitution.

After this judgment by the tribunal, the case is now before the PNGRB. It will be interesting to see whether the PNGRB asserts its independence and buries the ghost of APM once and for all.

Source: Business Standard

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NTPC not to suffer Rs 30,000 cr loss: Govt

The State-run NTPC will not suffer Rs 30,000 crore loss if it was to get natural gas at prices higher than those committed by Reliance Industries five years ago, Power Ministry has told Parliament.

"There is no loss to NTPC on account of fuel cost as the fuel cost is a pass-through to beneficiaries (customers)," Minister of State for Power Bharatsinh Solanki said in a written reply to Rajya Sabha.

It has finally reiterated RIL’s stand that there is no justification for NTPC to talk about the savings of Rs 30,000 crore when it is buying gas at USD 11 per mmbtu when it can get gas at USD 4.2 per mmbtu from RIL’s KG D6 basin. 

NTPC had taken RIL to court seeking implementation of the Mukesh Ambani-run firm's 2004 bid to supply 12 mmscmd of gas at USD 2.34 per mmBtu for 17 years.

"NTPC's tariff is determined by Central Electricity Regulatory Commission (CERC). As per the regulation for fixing the tariff under the Electricity Act 2003, the fuel cost (price of gas) is a pass-through to beneficiary states/union territories who in turn realise this from consumers," he said.

Source: PTI

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