Keep the reforms flowing

The gradual diesel price hikes, expected reduction in LPG and kerosene subsidies, and likely increase in domestic gas price have helped revive investor sentiment in India’s oil and gas sector.

But there is still much to do. For a country that depends on imports for almost 80 per cent of its oil and a quarter of its gas requirements, increasing domestic production is imperative to shield itself from supply shocks, which can come without warning. The latest crisis in Iraq, which has caused a spike in oil prices, is a case in point.

The BJP, in its manifesto, has promised to expedite oil and gas exploration in the country. It has its task cut out. Other than in Cairn’s Rajasthan asset, oil output has been stagnating while gas output has fallen sharply due to the woes in the KG-D6 block.

Auctions of oil and gas blocks in recent years have met with tepid response, likely due to concerns over market-linked pricing.

Delays in approvals have also resulted in some global oil majors relinquishing blocks.

Revenue sharing The previous government had initiated some steps to revive interest in the exploration segment. It proposed to allow contractors in the latest round of auctions (NELP X) to bid for all sources of hydrocarbons — oil, gas, coal bed methane and shale. The proposed freedom to sell at market determined prices and the attempt to get all clearances before putting the blocks on auction were also positive steps. The new government should build on this.

Another crucial shift on the cards was from the much criticised production sharing contracts (PSCs) to the production linked payments (PLPs).

The PSC mechanism, the major cause of fracas between the government and RIL, allows recovery of exploration and production costs before sharing profits with the government. The PLP mechanism, on the other hand, requires sharing of revenues with the government from the time production starts — this is considered more transparent.

But it remains to be seen whether operators will be enthusiastic about PLPs, especially for high-risk deepwater blocks. The new government should arrive at a consensus and get the NELP X auctions going with good incentives and speedy approvals.

Overseas forays Also, it should continue encouraging Indian companies, especially the public sector ones, to acquire energy assets overseas. More deals such as the stake buys by BPCL, ONGC and Oil India in the Rovuma gas asset in Mozambique and GAIL’s shale assets acquisition in the US will add to India’s energy security.

Moves to tap unconventional energy sources such as shale oil and gas within the country should also be encouraged.

While under-recoveries are set to reduce, clarity on how the remaining burden will be shared between the downstream companies, upstream companies and the government is important.

The government must also restart the direct benefits transfer programme to transfer LPG and kerosene subsidies — this can help to reduce illegal diversions.

Also read: >All pumped up?

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