Oil ministry revives debate on hydrocarbon incentives.

Oil ministry revives debate on hydrocarbon incentives.

New Delhi: Petroleum and natural gas minister Dharmendra Pradhan has signalled the government’s desire to debate the incentive regime governing hydrocarbon exploration. “When we make policies in India, we go the two extreme points. It can be the both (models). Both models can throw up some agreeable points. We will have to find a way,” Pradhan said while delivering the keynote address at Mint’s Energy Conclave in New Delhi on Friday. Pradhan indicated that the oil ministry was actively considering the issue and was willing to explore the middle ground between two contentious options: the existing cost-recovery model and the alternative revenue-sharing model. The production-sharing contract framework for the oil and gas sector currently allows for cost recovery by oil and gas explorers before they pay the government a share of revenue. There has been a debate on whether to retain the existing production-sharing agreement or shift to a new revenue-sharing one, with support emerging for both proposals. Explorers want the existing contract to continue. “Whenever we go for any policy, we can’t take extreme viewpoints. What is good today may become bad tomorrow and may again become good thereafter. We will have to create faith and bring clarity and showcase our long-term vision as a map to the country,” Pradhan said. “We want clean energy, reliable energy and affordable energy.” The oil minister’s latest comment follows a postponement in the new domestic gas-pricing formula till 15 November, after elections to the Maharashtra and Haryana assemblies are over. The cabinet committee on economic affairs (CCEA) had earlier deferred the decision on a price increase due from 1 July by three months until 30 September. The decision to further put on hold the price revision will bring some relief to fertilizer and gas-based power producers. Domestic gas is currently priced at $4.2 per million British thermal unit. “We should decide what kind of economic model should work in this country. It is for the democratically elected representatives to form that policy. It is for the political executive to decide that. We have been deliberating and contemplating about a good model,” Pradhan said. A government panel comprising secretaries in the ministries of power, fertilizer and expenditure department along with the additional secretary in the petroleum ministry has submitted its report to the government on gas pricing, which has to be taken up by the CCEA. Hydrocarbon explorers in India have made a total payment of $15.4 billion to the Union government as royalties, cess and profit petroleum, and $1.93 billion to state governments since 1994. Profit petroleum is the total value of hydrocarbons produced in a contract area after deducting costs incurred by the explorer. It is split between the government and the explorer. The minister emphasized the need for protecting the interests of consumers. “The entire world is watching what will be the gas pricing. When I was studying the issue, it came to my mind that the world is concerned about what should be the wellhead price. Shouldn’t we think what is an end-user’s capacity? The marketability of any product can only be assured by the end users’s purchasing capacity. That’s the reason why this government’s priority is also end user,” Pradhan said. While increasing domestic gas prices will raise the cost of power and fertilizers, a panel headed by C. Rangarajan, a former Reserve Bank of India governor and former chairman of the prime minister’s economic advisory council, had suggested a pricing formula in which the final base price was arrived at by the simple average of the respective weighted averages of the prices of imported gas across sectors over a 12-month period and that of prices in the three major international gas trading hubs. These are the US Henry Hub, the UK National Balancing Point and Japan’s custom-cleared rate. “India can’t become anyone’s replica. India will create its own model, and in India’s self-created model, the affordability of the country’s common people is an important subject,” Pradhan said. There has been waning investor interest in the Indian hydrocarbon sector, with around 70% of Indian basins remaining largely under-explored. The response to the New Exploration Licensing Policy (Nelp) has been tepid. “We want the world’s super majors in the petroleum and natural gas sector and power sector to come to this country and create affordable and sustainable energy and use the human resources of this country in a right way in their efforts,” Pradhan added. India approved Nelp in 1997—it took effect in January 1999—to boost hydrocarbon exploration. Under Nelp, the government allocates rights to explore hydrocarbon blocks through a bidding process and has done so in nine phases so far for 360 blocks, involving an investment of around $21.3 billion. “For smart economic management, we will have to reduce subsidy. While we will have to keep in mind the interests of the poor; it doesn’t mean that we will have to keep on providing the poor with the subsidy. We will have to make the poor self-dependent and to increase their purchasing capacity,” Pradhan said. India has an energy import bill of around $150 billion. That is expected to reach $300 billion by 2030. State-run oil marketing companies bore an under recovery of Rs.1.4 trillion last fiscal year as they sold fuels below cost of production. The 2014-15 budget estimated India’s subsidy bill at Rs.2.6 trillion, or 2.03% of gross domestic product, with oil subsidies amounting to Rs.63,500 crore. Commenting on the growing subsidy burden, Pradhan said: “We could have used it to build roads, improving health service in villages, providing basic facilities to the poor household.”

 Rahul kumar Gupta

PGDM,2nd Year