Pratim Ranjan Bose
One area that has received the
maximum attention of the Narendra Modi government during its 22-month stay in
power, is removing the discretionary powers of the government - that was most
abused by former Manmohan Singh-led UPA government - and make policy frameworks
more transparent, especially in the allocation of natural resources.
The energy sector was a priority,
in this context, as it was the hotbed of corruption ever since India was
liberalised in 1991. From dishing away creamy assets to the private sector on
nomination basis to gold plating of production cost to extract super normal
profits – India
has gone through the entire cycle.
The dangerous outcome of such
malpractices was evident when the Manmohan Singh government unsuccessfully
tried to increase domestic gas prices to an abnormal high of $8.4 a mmBtu. If
implemented it would have been the highest well-head price of gas anywhere in
the world. The anomaly was rightly corrected by
Modi government, last year, by adopting an understandable, logical and market-oriented mechanism to fix gas prices.
The recently announced
Hydrocarbon Exploration Licensing Policy, or HELP, is step ahead in ensuring transparency in oil and gas exploration and production. By resorting to revenue
(sales earnings) sharing model for all new projects, it had cut the roots of
the corruption namely production-sharing contracts.
Additionally, HELP allowed
pricing freedom from difficult deep-sea assets and launched uniform license for
all fuels. This will help commercial exploitation of alternate sources - like
gas hydrates, coal-seam-methane, shale gas and others – if available in any oil
and gas acreage.
End of gold-plating
Production sharing means profit-sharing.
Theoretically, it allows the government to share the risk of exploration and
acts as an encouragement to upstream oil and gas companies to enter the
uncharted territories. It was a kind of an assurance to allow explorers recover
the capital costs first, in the case of an oil strike. Such policies are in
vogue in Indonesia , Africa
and parts of Norway .
On the flip-side, it demands strict monitoring to ensure that companies are not inflating costs to deprive
the government its due share of profit. This is an old trick in business and is
referred as gold-plating. And, in the high-value oil game where money is
counted in billions of dollars, it can prove deadly. Talk to oil professionals
and you will know such practices were rampant in India . Politicians, bureaucrats
made money at the cost of the nation.
We are now moving on a
combination of two models. New exploration assets will be auctioned on revenue
sharing model, meaning it is the onus of the operator to keep costs low or
perish. The government will take away its share of revenue from the word go. The
established production regime, where fundamentals are well known, will continue
with production-sharing formula. Globally countries are moving to such mixed
regimes as it is easier to administer.
What about investment?
All these, however, doesn’t solve
the basic issue. Will it trigger investment in oil and gas exploration in India ?
Even the State-run ONGC, that
rarely meets success, announced a major gas find in the deep waters of KG
offshore in 2006. Cairn too struck oil (2004) in this period but in Rajasthan
onshore on the West.
Overnight everyone started
talking natural gas (as they spoke about power, iron ore and captive coal
mining). Companies sprung up from nowhere - many from the land of industrious
entrepreneurs of Gujarat - some in the oil
services sector and some others in exploration.
Many minted money through
abnormally priced and yet highly oversubscribed IPOs. Foreign companies too
swallowed the bitter pill. Most of the world biggies joined the bandwagon to
buy exploration assets in India .
Eastern offshore, then dubbed as the Indian answer to South Pars in Qatar , was the
top draw.
The scene is completely reverse
today. And, again it is not merely owing to recent meltdown in oil prices.
Barring the sole exception of
Cairn, rest of the big bang announcements (in KG basin) proved bunkum. Many
smaller companies have either left the scene or trying to make corners. Big
companies have little interest in Indian waters. An oil services company that
had Rs 700 crore market cap in the last decade is today valued at Rs 20 crore. The
‘KG gas’ was more gas. Investors are now betting for the next bubble, e-commerce.
Liberalise data acquisition
market
At a time when the earnings of
the oil-rich countries are in a declining mode, one cannot expect E&P
investments to shower in India .
No amount of ‘HELP’ and liberalisation of natural gas prices from riskier deep
water or complex assets are going to make a difference in the investment
scenario. It can at best help some existing players in KG basin turn the corner
and create fundamentals for a better tomorrow.
But, to really improve India ’s chances
we should focus on at liberalisation of a less talked about sector – data
acquisition market. Globally there are agencies which collect seismic data. Sometimes
such data is collected even as a past time activity in the hope of making money
by selling it to a prospective user. Countries like Australia welcome that on one
condition, a set of the acquired data must be submitted to the government.
The advantages are two. First, access
to quality data attracts prospective investors. Second, a parallel access to
the same set of data offers the concerned government a fair opportunity to
protect its national interests.
Somewhat like this happened in
Indian telecom sector in the last decade. When its handset business was booming,
Nokia did GPS mapping of India .
The data later found commercial use with other providers even though Nokia lost
the handset business. But when it comes to seismic data based on which E&P
companies take the all important decisions to bid for exploratory assets; India is a
laggard.
According to CEO of a foreign E&P
company, seismic data of nearly 85 per cent of Indian territories were
collected by State-owned oil companies decades ago using archaic technology. This
can be deadly for a business where technology is as dynamic as in telecom
sector. That’s not all. The data is inconsistent in nature and quality is
compromised. So how does it impact oil and gas investment? Well, the company
concerned, burnt its fingers in chasing the structures that barely existed.
To bridge the information gap, the
Modi government recently ordered a Rs 6500 crore (nearly $1 billion) 2D seismic
data acquisition programme (through ONGC and OIL) that would bring some
freshness in the data room. It's a welcome step but not enough. Because 2D is
an old technology. India
couldn’t go for more modern technologies due to prohibitive cost involvement.
Why don’t they better open the
sector to help natural accretion of quality information?
Make DGH accountable
Modi should also look at the
prospects of revamping the Directorate General of Hydrocarbons (DGH), the
upstream regulator. In private, oil executives refer it as the weakest
link in Indian exploration sector.
A classic example is a dispute
between ONGC and Reliance on gas pilferage in KG basin that has been going on
for years. Such disputes are common in oil and gas industry. But, a lethargic regulator that leaves
it on the warring camps to resolve issues makes it an unending debate.
That’s not all. The entire hype
created in the last decade over oil and gas potential points at a serious flaw
in the regulatory system. It is a common practice in Indian E&P sector to
announce reserve accretion. DGH gives a seal to such activities. The funny part
is in many cases such accretions never materialise into production. Check out
the rising trend of coal-bed-methane reserve and the dismal production scene and you will get a whiff of it.
A top oil executive puts the
issue in perspective. “When projections go wrong, company executives lose jobs.
Have you ever heard DGH officials losing the job for approving hyped up
production plans?” The bottom-line is: the government officials - many of whom
come on deputation from State-run oil companies - have minimum accountability
to the success or failure of Indian oil sector.
And, this must change.
***
(Disclaimer: Graphics collected from web. Will be withdrawn if objected)
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