India's oil economy saw baby steps in fuel pricing reforms

Last Updated: Wed, Dec 26, 2012 08:47 hrs

A record hike in retail prices of transport fuels and the decision to slash subsidies on cooking gas were the high points of India's oil economy in 2012, as the sector awaited pricing reforms and a new thrust in the production of hydrocarbons to attain energy security.

While the price hikes bothered consumers of petrol, diesel and cooking gas, the industry awaited government policy reforms aimed at giving a boost to exploration activity and to the search for new fuel sources.

At Rs.5 per litre, the year saw a record hike in diesel prices and a bold reformist step in the first-ever capping of doles on domestic cooking gas, or liquefied petroleum gas, at six cylinders per household per year.

The decision taken by a meeting of the federal cabinet, presided over by Prime Minister Manmohan Singh, in September came as state-run oil retailers had incurred a loss of a whopping Rs.138,541 crore in 2011-12 ($258 billion) by selling the fuel at below cost.

Even after these corrective measures, such losses, called under-recoveries, incurred by the three state-run oil firms -- Indian Oil, Bharat Petroleum and Hindustan Petroleum -- in the current fiscal are projected at around Rs.1,67,415 crore (over $300 billion).

During the current fiscal, for instance, the government share of subsidy on a cooking gas cylinder is Rs.23 (nearly half US dollar) out of a total subsidy of Rs.504 ($9). The balance is borne by the OMCs.

On the impact of under-recoveries, Indian Oil Corp chairman R.S. Butola told mediapersons just prior to the fuel price increases: "We have a deficit of more than Rs.5,000-6,000 crore ($900 million to $1 billion) every month, depending on oil prices. So, our borrowings will go up."

The last few months of the year also waited for a report of the panel headed by Prime Minister's Economic Advisory Council Chairman C. Rangarajan which is looking at changes in the present regime governing oil and gas exploration contracts as well as gas pricing.

The core of the exploration mechanism is the production sharing contract (PSC) that currently provides for explorers to first recover all of their capital and operating expenditure from oil and gas revenue before sharing profits with the government as per a specific formula.

The existing system was criticised by the national auditor (CAG) as it gave incentives to private producers and minimised the government's profit.

The Rangarajan panel is expected to suggest moving to a production-linked payment regime where explorers may be asked to bid for a percentage of output they would share with the government. The firm offering the maximum would win a block or area.

Between the consumer and explorer, the biggest news in the sector was the decline in gas production from the KG-D6 gas blocks in Andhra Pradesh operated by a consortium led by Reliance Industries Ltd (RIL).

The petroleum ministry reported that natural gas production from fields operated by private companies and joint ventures was around 21.6 billion cubic metres (bcm) in 2011-12 as against 26.7 bcm in the previous fiscal. The main reason cited for the decline was lower production from the Krishna Godavari (KG) basin blocks operated by RIL.

The ministry informed the parliamentary Standing Committee on Petroleum and Natural Gas that RIL have been advised to complete and put on production more gas wells in the area as well as to revive sick wells.

The house panel regretted that the oil ministry had not penalized the operator for shortfall in achieving the Field Development Plan of the KG-D6 block.

RIL has also been wrestling with the oil ministry on the price of gas that will apply when its present $4.2 per million British thermal unit rate for KG-D6 expires in March 2014.

India imports 83 percent of its crude oil needs, and in the search for energy security, state oil companies are pursuing acquisitions in hydro-carbon resources overseas.

"Hydrocarbon sector is the key to ensuring energy security in the country, so it is important that India continues developing its hydrocarbon sector," Petroleum Secretary G.C. Chaturvedi told IANS.

The Oil and Natural Gas Corp Videsh Ltd (OVL), the state explorer's foreign operations arm, produced nearly 9 million metric tones of oil and gas equivalent during the fiscal year ending March from its assets abroad in Sudan, Vietnam, Venezuela, Russia, Syria, Brazil, South Sudan and Colombia.

In its biggest acquisition till date, OVL in November agreed to pay US energy giant ConocoPhillips about $5 billion for the 8.4 percent stake in Kashagan, the biggest oilfield discovery in four decades.

Public sector oil firms have acquired assets in more than 20 countries.

Recently, shale gas has globally emerged as a new and important source of energy. India has several shale gas formations in sedimentary basins and the oil ministry has taken several steps to identify prospective areas for exploration.

In September, the Gas Authority of India Ltd inked a deal to buy 20 percent stake in a shale gas area operated by Carrizo Oil and Gas Inc in the US for $95 million.

The new year holds promise on shale gas. The government has circulated a draft shale oil and shale gas policy and a final document is expected soon.

Highlights of the oil economy in 2012:

. Record hike in diesel price and subsidy cap on LPG

. OMC under recoveries amount to Rs.138,541 crore ($258 billion) in 2011-12

. Changes to production sharing contract (PSC)

. Rangarajan Committee looking into changes in gas pricing

. Shortfall in gas production from KG-D6 (Andhra Pradesh) fields

. Energy security- state oil companies acquiring assets abroad

. Draft policy on shale oil and gas.

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