A committee under Dr Rajiv Kumar, vice-chairman, NITI Aayog on ‘Enhancing Domestic Oil & Gas Exploration and Production’ has recommended taking away 97 oil and gas fields – out of a total of 149 marginal fields – from public sector undertakings [PSUs] viz. Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL], auction to the private entities and giving them ‘complete freedom of marketing and pricing’ on supplies from these fields.
The committee has also recommended that ONGC/OIL should make efforts to improve performance of the remaining 52 fields to achieve specified production and financial targets within a given time frame failing which even these will be taken back by the government for privatization.
Further, in respect of the 66 lucrative producing fields [these account for an overwhelming 95% of India’s total oil and gas production], the PSUs will have to go for recovery maximization and if need be, choose field specific implementation model including joint ventures [JVs] with private companies to enhance output.
The PSUs have expressed displeasure over the recommendations observing that these tantamount to ‘asset stripping’ aimed at benefiting private companies. They have also objected to the timing of the move saying that a policy decision with far reaching ramifications such as this could have been left to the new government which will take charge in a few months from now.
The concern over timing is unwarranted as until such time the Election Commission of India [ECI] notifies the elections and the code of conduct takes effect, the government of the day has every right to take and implement policy decisions.
As regards, asset stripping, this has to be seen in the backdrop of scant attention paid by ONGC/OIL to the mentioned fields. The undertakings have not put in requisite efforts for development, commercialization, management and maintenance of these assets. The proof of pudding is in eating. The fields are 149 in number but, these account for a mere 5% of the country’s total production of oil and gas.
If, by giving these fields to private companies, it is possible to increase output and thereby help reduce dependence on import [currently, about 83% in crude oil and over 45% in gas], there is no reason as to why this should not be tried. A scenario of the assets continuing to languish when the country spends mammoth sums on import year-after-year [Rs 480,000 crore during 2017-18] is unconscionable.
However, giving to private companies [who get these fields] freedom of marketing and pricing will create an anomalous situation. Under the existing policy guidelines in vogue since November 1, 2014, for all of domestic supplies from fields given under NELP [new exploration and licensing policy] as also blocks given on ‘nomination’ to ONGC/OIL under pre-NELP, the price is a weighted average of prices at 4 international locations in USA, UK, Canada and Russia.
In respect of supplies from 97 fields, at present, ONGC/OIL get a uniform price as per the above formula which from April 1, 2019 is projected to be US$ 3.72 per million Btu [British thermal unit]. Besides, even the allocation/distribution is decided by an inter-ministerial committee under the chairmanship of secretary, ministry of petroleum and natural gas [MPNG].
After these fields are passed on to private companies, as per the recommendations of the committee, they will get complete freedom to fix the price under a market-based scenario. Considering that domestic supply is far short of the demand, they will be able to price it much higher which could be closer to the landed cost of imported LNG or more than double the domestic price. This will be outright discriminatory.
Already, the existing policy dispensation suffers from a highly differentiated pricing structure with the price varying substantially depending on the source of supply.
The supplies from deep/ultra-deep, high-pressure/high-temperature [HP/HT] fields get ‘premium’ price linked to prices of alternate fuels including fuel oil, naphtha and imported LNG. The unconventional hydrocarbons viz. shale gas, CBM [coal bed methane] from the fields already awarded under NELP get market-based price. The supplies from fields given under Open Acreage Licensing Policy [OALP] – launched in 2017 – also qualify for market-based price.
For fields given under pre-NELP wherein the agreement with operators did not require approval by the government, prices as mentioned therein apply. All other fields under NELP and pre-NELP get low formula-based price as per Nov 2014 guidelines.
If, now the 97 fields to be auctioned to potential investors are allowed market-based price, this will create one more category. This price differentiation being based on who operates the field [private company versus a PSU] is completely devoid of any logic; indeed bordering on absurdity.
Such a policy is not in India’s best interest. It gives conflicting signals to producers. They are unlikely to pay much attention to fields which get the low price. Besides, it will prompt companies to lobby for putting their supplies in a category which qualifies for higher or market-based price. This is far from providing a conducive environment for attracting investment and maximizing production.
The government should come up with uniform pricing for oil and gas applicable to all supplies irrespective of the source. The market-based pricing could be a preferred option, but this could affect user industries mainly fertilizers, power, CNG, LPG etc which cater mostly to the poor. A uniform formula-based price [November, 2014 guidelines] would strike a balance between the interest of producers and consumers.
Oil and gas business is driven by volumes. So, the focus should be on maximizing throughput. This will yield good returns even with low price. If, a field is unable to achieve high production then, the price alone howsoever high can’t ensure its viability. The government should therefore, get over its obsession with higher price and instead, focus on removing all hurdles – bureaucratic/procedural/policy – coming in the way of increasing production.