NTPC gets 1.2m cm/d D6 gas

NTPC signed a contract with Reliance for 1.2m cm/d D6 gas on February 16, but is waiting for GAILto free up capacity on the HBJ beforesigning up for another 2.05m cm/dthat it is entitled to. NTPC is already receiving 610,000 cm/d D6 gas at its Anta power station in Rajasthan but was allocated a total 3.85m cm/d by the government last November. These fresh supplies of 1.2m cm/d bought at the ex-Gadimoga landfall price of $4.2/mmbtu plus taxes will be supplied to NTPC’s power stations at Auraiya, Dadri and Faridabad, hopefully easing the chronic power shortages faced by north India. Reliance values NTPC as an important customer. “NTPC draws a consistent quantity of gas because it has so many power stations,” we hear. “If one power station is closed it can divert gas to another.” NTPC insists that none of the D6 gas will be used at it Kawas or Gandhar power stations - at the centre of a bitter legal battle between the two companies over price.

Source: www.petrowatch.com


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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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Budgeting for deregulation?

The oil and gas sector was banking on Budget 2010-11 to deliver a pretty long wish list. But when the FM finally delivered his speech, it was a rare display of fiscal prudence. He kept in line with the recommendations of the 13th Finance Commission, even against the challenging backdrop of recessionary hangovers coupled with spiralling food inflation.

The Budget saw customs duty of 5% restored on crude petroleum and excise duty on both petrol and diesel increased by Re 1 per litre. As a result of this measure, petrol prices will rise by Rs 2.71 per litre and diesel by nearly the same amount, considering Delhi as the benchmark. Predictably, this measure did not win kudos from the Opposition, which staged a dramatic walkout when it was announced. The Opposition says it is worried about the potential impact that increased duties on petroleum products will have on inflation in general. The oil and gas industry, however, appears to have mixed feelings about the entire gamut of measures that have been proposed in this Budget.

The issue of rationalisation of excise duties on petroleum products (especially petrol and diesel) needs to be put in perspective. We must see them in the light of this Budget, but also historically. In line with the recommendations of a number of government committees that have deliberated the rationalisation of duties on petrol and diesel from time to time, the government has been reducing excise duties in a progressive manner on branded petrol and diesel. It reduced the excise duty from 30% and 14% respectively (that existed till February 2005) to Rs 6.5 per litre and Rs 2.75 per litre respectively from July 2009. This progressive but major rationalisation from ad valorem to a specific structure should be commended even at the first instance. After all, it has already proved successful in weeding out a chunk of cascading effect from the tax structure itself. In this light, the increase of excise duty on petrol and diesel to Re 1 per litre and its potential cascading effect is insignificant. It also needs to be kept in mind that the lion’s share of the distortions in petrol and diesel prices comes from state level irrecoverable duties (like octroi, entry taxes and transit taxes). These are mostly ad valorem and need to be rationalised at the first instance in order to minimise the cascading effect.The question is whether the Budget’s moves imply that the government is getting ready to announce further reforms in the oil sector. It needs to be mentioned at the outset that any increase in excise or customs duties goes straight to the government coffers as additional revenue. Thus, the rise in fuel prices that results from this increase in duties does not directly benefit the public sector oil companies, which are facing mounting under recoveries. However, the corollaries that the FM came out with in this Budget—in terms of pegging subsidy on petroleum products to Rs 3,108 crore in the next fiscal compared to a figure of Rs 14,954 crore this fiscal—does have the whiff of progressive reforms.

The government has also decided to compensate oil companies in cash terms rather than by issuing oil bonds with debt implications. The cash compensation has been fixed at Rs 12,000 crore for the three public sector oil marketing companies for this fiscal against their demand of Rs 31,000 crore merely on account of cooking fuel. All these measures suggest a movement towards deregulation and freeing of pump prices of petrol and diesel in line with the Parikh Committee’s recommendations, the implementation of which now seems imminent and inevitable. But with the Opposition already staging a walkout on changes in excise duties, one has to consider that reforms may attract a strong political backlash. The FM, however, in his Budget speech has relegated that responsibility to the petroleum ministry, although it is common knowledge that decisions would be taken in consensus.

The restoration of the basic customs duty on crude to 5% will have positive implications for upstream oil producers like ONGC and OIL as it enhances the protection of indigenous crude. However, the implication for down-stream refiners would be negative for the obvious reason of increase in prices of procured crude.

One of the measures, however, that has not gone down well with the industry is the increase of Minimum Alternate Tax (MAT) from 15% to 18%. Given the fact that GDP received a much-needed boost in 2009-10 from the KG basin and that Cairn Energy has commenced crude production in Rajasthan, the business of oil and natural gas exploration and production was actually seeking more fiscal incentives. This would have helped them take more risk in untapped areas. One incentive that the industry had hoped for was exemption from MAT provisions. However no such exemption has been granted on profits derived from commercial production or refining of mineral oil—which are otherwise fully exempted from payment of income tax for a period of seven years (usually referred to as tax holiday).

The measures suggested in Budget 2010-11 do hint at imminent reforms. It is also extremely important to understand that there could be no better time to reform the oil sector than now, as the economy is recovering and the international crude market is much less volatile. In this light, the argument for universal insulation of auto fuel prices—primarily used by the more affluent—is also on very weak ground. Withdrawal of such insulation will, after all, be the first step towards inculcating conservation habits and encouraging energy security. From this perspective, the marginal increase in excise duty is just the tip of an ice-berg as far as necessary measures are concerned.

Source: Financial Express

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Implications of introducing negative tariff protection on SKO & LPG

Background: 

Recent notification by the Ministry of Finance has maintained customs duty on domestic LPG & PDS SKO as nil while increasing the customs duty on crude from nil to 5%. This implies a negative tariff protection of 5% to SKO & LPG, which together constitute over 17% of consumption barrel. 

In addition, the NCCD (National calamities Contingency Duty) of Rs.50 per MT on imported crude is also retained. The NCCD is not passed on to the consumers in the pricing structure and is absorbed by the refining industry. Worse still, even on exports the refineries absorb this element. 

The implications of the changes in tariff are as detailed below. 

Impact on the refining industry: 

1. Negative protection (including NCCD) is against the considered opinion of economists and experts: 

Various industry & tax reform committees set up by the government have concurred on eliminating negative protection on finished goods in order to promote domestic industry. Some highlights from a few notable committees is given below: 

Tax Reforms Committee, Dr. Raja J Chelliah Aug 1992 

Government should rigidly adhere to one basic principle, namely, while consumers should not be asked to bear undue burden through unwarrantedly high protection to particular groups of producers, domestic producers should not be exposed to unfair competition in the name of not adding anything to the cost of ?essential goods? 

Strategic Planning Group on Restructuring of Oil Industries (R Group), Dr. Vijay Kelkar Sep 1996 

The current tariff rates contradict the rational tariff structure of keeping import duty on raw materials lower than that on final products. In the case of petroleum sector, the import duty on crude is 27% ad-valorem which the import duties on finished product are a maximum of 32% on MS, HSD and ATF; nil on Naphtha and SKO; and only 10% on LPG.  Such a duty structure is somewhat perverse in the sense that it provides a negative rate of protection to refining sector PSUs while giving a high rate of effective protection to private sector petrochemical companies? 

Expert Technical Group Nirmal Singh 1997    

The committee suggested eventual tariffs of 15% on MS, HSD, LDO, ATF , 10% on LPG & 0% on SKO while maintaining crude at 0%, thus ruling out negative protection for any finished product. 

Kelkar Task Force, Dr Vijay Kelkar 2002    

The committee suggested eventual tariffs of 10% on petroleum products & 5% on crude, thus ruling out negative protection for any finished product. 

The anomalies of negative tariff protection that existed in the petroleum industry were gradually removed in line with the above recommendations as is evident from Exhibit 1. 

Exhibit 1: Phasing out of negative duty protection on petroleum products 

2. Negative protection will force refineries to change the production pattern leading to import of LPG & SKO 

The country is refining surplus. The refining capacity is 178 million tonnes (MMT) and the expected demand of petroleum products is about 135 MMT tonnes in 2009-10. The production capacity for LPG (about 9.5 MMT) is not enough to meet the demand fully (about 12.5 MMT), forcing imports. Fiscal incentives encourage production of LPG will retain imports at this level. Now that negative duty protection is a reality, for LPG & SKO, refineries may adjust their production more in favour of MS and ATF for exports. This will increase the quantum of imports in the coming years. This will lead to additional foreign exchange outflows in respect of higher product prices and net freight payable on LPG and possibly SKO imports. 

3. Negative protection is detrimental to the high investments required in the refining sector 

However, refining capacity is higher than demand at present; economic growth projections will soon necessitate additions to refining capacity. In addition, India is likely to become a refining hub.  The expansion needs investment. With SKO & LPG constituting around 17% and fuel & loss around 8%, refineries will not be able to recover duty paid on crude on 25% of the production barrel. This will be a heavy burden on refining sector and will act as a disincentive for fresh investments required in the sector. Negative protection on LPG and SKO may result in our revisiting the years when we imported finished products heavily. 

The profitability of refining industry has been declining. Older and less efficient refineries may close down, which may take several years. In the meantime, our refining industry must become financially strong to become an international force to reckon with. Saddling them with negative protection at this time may mean we lose the opportunity of becoming an efficient refining hub in a few years down the line. We stand to lose a great opportunity and hence the negative protection needs to be removed. 

4. Negative protection does not exist for any petroleum products anywhere in the Asia Pacific region 

Conclusion 

In order to encourage investments in domestic refining, strengthen our refining industry and discourage unnecessary imports it is imperative that the negative protection on LPG & SKO be removed. There is no justification to continue with NCCD, unless it is recovered from the ultimate consumers via identified increase in refinery prices to oil marketing companies.   

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RIL's predominantly gas rich KG-D6 block, has also helped boost availability of the environment friendly fuel in the country

Private sector oil companies Reliance Industries  and Cairn India  will help push up India's crude oil production by 11 per cent to 36.7 million tones during the current fiscal, the Economic Survey said on Thursday.

For a nation that is 75 per cent reliant on imports to meet its crude oil needs, the Krishna-Godavari basin deep-sea oil find by RIL, and Rajasthan's  Barmer desert discovery by Cairn will for the first time in five years raise the domestic output.

"During 2009-10, the projected production for crude oil is 36.7 million tonnes, which is about 11 per cent higher than the actual crude oil production of 33.5 million tonnes in 2008-09," the pre-Budget statement on health of the economy said.

Domestic crude oil production has remained around 34 million tonnes and natural gas at about 32 billion cubic meters during the past five years.

"This (rise in output this fiscal) is primarily due to increase in crude oil production from Rajasthan (2.4 million tonnes) and the KG deepwater (0.8 million tonnes),"

RIL's predominantly gas rich KG-D6 block, off the east coast, has also helped boost availability of the environment friendly fuel in the country.

"The projected production for natural gas for 2009-10 is 50.2 bcm which is 52.8 per cent higher than the actual production of 32.8 bcm in 2008-09," the Survey said.

RIL's 60 million standard cubic meters a day of gas sales from D6 has helped it overtake state-owned ONGC as the largest natural gas seller in the country.

"With 15 new oil and gas discoveries during 2009-10, the domestic availability is expected to improve,"

Gas production from KG-D6 began on April 1, 2009, and it was expected that output would be ramped up to 80 mmscmd by the end of 2009-10.

"An Empowered Group of Ministers (EGOM) constituted to decide commercial utilisation of gas has allocated 61.611 mmscmd of gas produced from KG-D6 on firm basis (mostly to power and fertiliser plants) and 30 mmscmd on fall-back basis to various priority sectors," it said.

Crude oil production from Cairn's Rajasthan fields started from August 29, 2009, and current output is around 20,000 barrels per day. "Production from this block, which is of very high quality, is likely to increase during 2009 through 2011 ... The production expected from this block during 2009-10 is 2.4 million tonnes."

The government has designated Indian Oil, Mangalore Refinery and Hindustan Petroleum for lifting part of the crude oil produced from this block.

ONGC is facing decline in output from old and matured fields. To check fall in output and to raise production, ONGC is implementing improved oil recovery and enhanced oil recovery projects in 14 ageing oil and gas fields."Eighteen new IOR and EOR schemes have been approved to increase the recovery factor from 14 ageing oil and gas fields at a cost of Rs 14,150 crore," the Survey said.

To boost domestic oil and gas production, the government in 1999 launched the New Exploration Licensing Policy aimed at intensifying exploration and an investment of $11.9 billion has already been made in 203 blocks or areas.

Since January 1999, 72 oil and gas discoveries have been made in 21 blocks given out under NELP. "Under the NELP, more than 600 million tonnes of oil equivalent hydrocarbon reserves have been added," the pre-Budget Survey said.

Besides, concerted efforts have been made to put new and marginal fields in production. "Out of 165 marginal fields, ONGC has already monetised 56. Of the remaining 109 fields, 68 are being monetised by ONGC, 20 through service contracts and 21 are likely to be offered (to private firms)," it said.

Balance recoverable crude oil and gas reserves in the country are 736.45 MT and 1,119.55 bcm respectively.

The government is also encouraging national oil firms to aggressively acquire oil properties abroad. ONGC Videsh Ltd produced about 8.75 MT of oil and equivalent gas in 2008-09 from its assets in Sudan, Vietnam, Venezuela, Russia  Syria and Colombia.

In 2008-09, OVL has acquired seven blocks in Brazil, Columbia, Myanmar, Venezuela and Trinidad and Tobago. The joint venture of Oil India and Indian Oil Corp has acquired on block in Timor Leste and two blocks in Egypt.

India's total installed refining capacity increased to 177.97 MT as on April 1, 2009 and new units at Bhatinda, Paradip and Bina would help increase it to 240.96 MT by 2012

Source: http://business.rediff.com

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Mukesh Ambani donates Rs five crore to Tirumala temple

RIL chairman Mukesh Ambani donated Rs five crore to the famous hill shrine of Lord Venkateswara at Trimula.
 
Temple sources told PTI the donation was made to meet the TTD's ongoing Rs 100-crore gold plating project for the sanctum sanctorum.

The cheque was handed over to Tirumala Tirupati Devasthanam (TTD) chairman D K Adikesavulu Naidu by a RIL official.

Ambani, an ardent devotee of Lord Venkateswara, had earlier donated a Rs five crore guest house constructed by RIL on the hills in 2007.

Source: Economic times

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Missed opportunity for reforming petroleum pricing

The Budget stimulates growth and 9% is an achievable target if the rains are normal. It also facilitates growth and encourages private investors. The tax cuts provide substantial additional disposable income to the middle classes. This should increase domestic demand. The impact of this should more than compensate the reduction in fiscal stimulus. Also, the projected fiscal deficit to 5.5% is modest and for all these the finance minister should be congratulated.

There are some good measures to reform energy policy. What we had recommended in the integrated energy policy concerning coal sector are promised—a coal regulator and auctioning of coal block. However, the monopolistic power of coal India will continue.

The outlay for renewable energy of Rs 1,000 crore is welcome. It should give a boost to solar power, which is the most important sustainable energy source of the country. Yet, how this money is spent and how the subsidy is distributed will be critical in deciding if it stimulates development of solar technology or not. One can get solar power by giving subsidies and if it does not improve technology, then the subsidy given is more or less wasted.

But my big disappointment is with respect to the measures on petrol and diesel prices. The Budget has increased customs duty on crude and petroleum products to 5% and 7.5%, respectively. Also, excise on petrol and desire have been raised so that the price of petrol will rise by Rs 2.67 per litre and the price of diesel will rise by Rs 2.57 per litre. Yet, what is perplexing is that if the government is willing to take the political fallout of raising prices, why does it not free the prices and let them be market determined as recommended by the expert group on petroleum pricing?

Moving to market determined prices would not have raised diesel prices any more than what the Budget proposes and petrol prices could have been raised a bit more. The advantages of moving to a competitive market would have been many. It would have provided a sustainable energy policy when crude price on the world market fluctuates. If the world price increases to $90 a barrel, with the present policy the government would find itself facing the fiscal stress from large under-recoveries of public sector oil companies. We also forego the benefits of competition that the free market would have brought about. The burden of petrol price increase would have been meagre compared to large tax breaks given to the middle class.

I am also disappointed that a differential additional excise on diesel drive passenger cars was not levied, as suggested by our expert group.

The emphasis on reforming subsidies is welcome. A lot is expected of the Unique Identification System. However, UID will only provide a platform on which subsidy targeting scheme would have to be mounted. The UID will verify a person as the person one claims to be when one goes to a shop. However, if subsidised ration is to be given to a person, he would have to be identified as the deserving person and a smart card linked to his UID would have to be issued. Thus, if subsidies are to be effectively targeted, a lot of advance action needs to be taken now. I hope that the Budget provides for such action.

Source: Financial Express

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