In the past, governments have used profit making public sector undertakings [PSUs] in the oil and gas sector viz. Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL] for reining in fiscal deficit that was getting out of control – most of the times – due to profligacy in revenue expenditure triggered by sheer populism to garner votes.
The prominent measures used were asking them to give discounts on sale of their crude output to downstream oil PSUs such as Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL] so that the latter in turn, could sell petroleum products viz. LPG, kerosene et at subsidized price to the consumers; insisting on high revenue share of around 50% [including royalty and cess paid as a share of revenues and profit petroleum paid as a share of profits]; high/special dividend paid on the shareholding of union government and proceeds from the divestment of its holding.
But, there is something more bizarre whereby ONGC/OIL were used by then governments to help companies in the private sector make profits and grow at the expense of the former. The issue in this regard pertains to payment of royalty and cess levied on indigenous production of crude and gas.
In the 1990s, the government awarded some discovered oil and gas fields to private companies purportedly to attract investments in the hydrocarbon sector. As an incentive, however, the liability of payment of royalty and cess was put on ONGC and OIL and they were made the licensees of the blocks. While, ONGC and OIL had the option to take participating interests [PIs] of 30-40% in the blocks or just remain the licensees without any stake, they were required to pay 100% of the statutory levies.
The arrangement was ‘inequitable’ and ‘discriminatory’. One gets a sense that this was contemplated by bureaucrats to make ONGC/OIL first make investment in the discovery of hydrocarbons [for 26 discovered blocks, production-sharing contracts were signed under ‘nomination’ route] and then, perpetually contribute 100% towards royalty and cess. Despite incurring these costs, they had no share in the profit.
On the other hand, the private entity which made no investment in the discovery of the field nor any contribution towards levies got away with the entire profit [albeit after parting with government share in profit petroleum]. Even when ONGC/OIL took 30-40% share then also, the dispensation would remain unfair as the contribution towards royalty and cess continued at 100%.
Meanwhile, the burden of royalty/cess has increased substantially. The cess on oil increased from Rs 2,500 per tonne between 2006-07 and 2011-12 to Rs 4,500 per tonne in 2012-13 and further to Rs 6,600 per tonne currently. This increased the liability on ONGC/OIL even as the private companies remained unaffected.
Of the blocks assigned on ‘nomination’ basis under the pre-NELP [new exploration and licensing policy], seven are operational. Even in these, the private entities viz. Joshi Oil and Gas, Vedanta and Hindustan Oil Exploration Company [HOEC] have not brought much fresh investment thereby defeating the purported intent of the policy. An argument that high levies was a deterrent does not cut ice as anyway, these entities were not liable to pay.
In this backdrop, it is good to see Modi – government having taken a decision in July 2018 that in respect of blocks for which PSCs were signed before 1999, the cess and royalty will now be paid by all contractors as per their PIs in the block. Meanwhile, the outgo on account of linking royalty and cess to PI has been made cost-recoverable with prospective effect.
The policy decision is a follow-up to the developments in regard to the prolific Barmer Basin oil block in Rajasthan. Prior to 2010, Cairn Energy’s had 70% stake in the block and balance 30% was with ONGC which was paying 100% of the royalty and cess. In 2010, when Vedanta bought in the share of Cairn Energy, ONGC approved the deal on the condition that Vedanta would pay these levies in proportion to its 70% PI in the block.
While, this makes the regime ‘fair’ and ‘equitable’ to all stakeholders in the blocks assigned prior to 1999, the problem of unjust loss to ONGC/OIL for the past period remains as the change is ‘prospective’ . Even as ONGC has sought intervention of ministry of petroleum and natural gas [MPNG] for reimbursement of large amounts paid by it as royalty/cess on behalf of its partners, the requested relief in this regard is unlikely.
As regards, the burden of levies and the share of revenue that the contractor has to share with the government, under the NELP [for blocks given from 1999 onwards], the share was brought down to 40%. Though, this was still substantial, it needs to be weighed against full recovery of costs allowed under those PSCs before sharing the profit-petroleum with the government.
Under the Hydrocarbon Exploration and Licensing Policy [HELP] launched in July 2017, the government has allowed explorers to bid for revenue shares which is about 30%. While, this is good omen, there is an urgent need to lower the burden of levies which continue to be high. Though, these are cost recoverable, one cannot be oblivious of the impact this has on the user industries – mainly fertilizers, power and CNG which cater to the poor/common man.
The present dispensation has also brought about another major policy change whereby since 2016-17, ONGC and OIL are no longer required to offer discount on their sale of crude to downstream oil PSUs viz. IOCL/BPCL/HPCL. While, the prevailing low international price of crude during that period helped it take that decision, now with steep increase in the price since early 2018 – threatening to upset its fiscal math – it may be under pressure. But, it must refrain from resurrecting that retrograde practice.
It should also put in place a uniform pricing for gas to give consistent policy signals to all stake holders. For details:-