At a FICCI seminar on ‘Unleashing India’s Domestic Exploration and Production Potential’, minister for petroleum and natural gas, Dharmendra Pradhan ruled out giving statutory powers to upstream oil and gas regulator Directorate General of Hydrocarbons [DGH]. He was responding to a suggestion made in a presentation by McKinsey that DGH should be given powers similar to the Securities and Exchange Board of India [SEBI] – an independent body which regulates the activities in securities market.
DGH is a technical arm of the oil ministry which currently manages hydrocarbon resources, assists the government in auctioning oil and gas exploration fields and monitoring production sharing contracts [PSCs] – those are signed with private contractors who get the fields under the auction process. It gets the staff from public sector undertakings [PSUs] such as Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL] on deputation or tenure basis.
The proposal for creation of an independent, statutory regulator for upstream oil sector is not new. It had been suggested by various committees in the past. In 2013, a committee, under former finance secretary Vijay Kelkar had recommended hiving off DGH’s financial oversight function and vesting it with income tax authorities. It also recommended that DGH should restrict themselves to technical oversight of contractors. Parliamentary standing committees too have recommended an independent upstream regulator.
Notwithstanding the above, minister’s dis-orientation towards a regulator is based on the premise that the sector is yet to develop in the country and needs government support. Hence, it is too early to give DGH the role akin to a regulator. He further adds that establishing independent regulator to emulate a market mechanism will not be appropriate at this stage. The argument suffers from several inconsistencies and contradictions.
First, for Pradhan to argue that he won’t set up the regulator because the sector has not yet developed is a bad idea. On the contrary, for planned and orderly development of the sector, it is imperative that the government should first put in place an independent regulator. This sequence was followed in telecommunications and power wherein Telecomm Regulatory Authority of India [TRAI] and Central Electricity Regulatory Commission [CERC] were established in 1997 and 1998 respectively. The sectors witnessed rapid growth thereafter.
In hydrocarbon sector, production of oil and gas got a boost in late 70s following major discovery in Bombay High and South Bassein region. While, initially this was with PSUs viz. ONGC and OIL, in the late 90s, private sector was involved with the launch of New Exploration Licensing Policy [NELP] and assignment of a number of fields to private contractors. However, with growing demand, current production meets only 20% of oil and 65% of gas requirement.
A major reason as to why India continues to be trapped in low output syndrome despite major discoveries in late 70s and yet again in 2000s viz. Krishna Godavari [KG] basin off Andhra coast is lack of pro-active engagement with the sector, absence of a conducive policy environment and above all failure to set up an independent regulator [this is in contrast to telecommunications which saw rapid growth during the last two decades in the follow up to setting up of regulator].
Second, an argument that the sector needs government support is frivolous. ONGC and OIL through whom it carries out most of the exploration and development projects in the sector depend on their own internal resources [plus market borrowings]. They have not taken any support from the union government; far from that, the former have only funded latter’s increasing budget needs. As regards providing policy support, that can always be given independent of whether a regulator is in place or not.
Third, Pradhan’s observation “establishing independent regulator to emulate a market mechanism will not be appropriate at this stage” pre-supposes that if regulator is set up, this has to be preceded by letting market forces work. And, since the latter can lead to problems at this stage of development, former is not desirable. The linkage is far-fetched and over done.
One could not agree more on the un-desirability of letting market mechanism decide price of gas and its allocation etc. Given that domestic supply is hugely short of demand and infrastructure for import, handling and transport is in a few hands [mostly PSUs], removing control will result in exploitation of consumers by way of steep increase in price and even cut in supply. This in turn, will have serious repercussion on sensitive user industries such as fertilizers and power whose consumers are predominantly poor farmers and consumers of food and electricity.
But, where the minister is making a mistake is to unnecessarily forge a link where it does not exist. The regulator can be set up even while continuing with the extant dispensation of formula based pricing in vogue since November, 2014.
The apprehensions of the minister are without any valid basis. Setting up of an independent regulator is urgently needed to give stakeholders reasonable assurance that various contractual commitments made under PSCs or otherwise, are honored; further, they will be protected against unilateral and ad hoc changes in policies. In turn, this will bring about ‘predictability’ and ‘certainty’ in regard to the operating environment and thereby help in attracting investment especially by MNCs.
This has also to be viewed in the backdrop of several irregularities pointed out by Comptroller and Auditor General [CAG] in the administration of PSCs under the extant dispensation [read: DGH – a mere extension of the oil ministry managing the show]. Entrusting the job to an independent regulator will ensure ‘transparency’ and lend ‘credibility’ to the exercise.
There exists another regulator viz. the Petroleum and Natural Gas Regulatory Board [PNGRB] which oversees downstream activities like laying of pipelines and fuel marketing [albeit without powers to review pricing]. It makes no sense to have two entities to regulate same products, one for upstream and other for downstream. There should be single/unified regulator for all activities.