The new year could turn out to be a game-changer for oil and gas sector

Last Updated: Mon, Dec 31, 2012 19:13 hrs

If 2012 saw little progress in solving key issues pertaining to the domestic oil and gas industry such as lack of clarity in regulation, inviting fresh investments to exploration blocks and increasing domestic gas prices, 2013 will be a game-changer for the sector, say experts and industry officials.

British energy giant BP Plc is planning to invest around $7 billion (Rs 38,550 crore) in the Reliance Industries Ltd (RIL)-operated D6 block at the Krishna-Godavari (KG) basin, off the Andhra coast.

But there are apprehensions in the industry that the plan is holed up in bureaucratic formalities. 

  • Govt is expected to actively move on KG D6 gas price revision. Current price valid till March 2014
  • PSC likely to be reviewed following Rangarajan’s report
  • Major M&A deals expected in E&P sector
  • Pricing pains in controlled products to continue
  • Direct subsidy transfer may bring some relief in subsidy burden

“Considering the potential of the KG-D6 block and the BP investment of $7 billion, it would be expected that the issues holding up investments in KG-D6 would move towards a resolution,” says Kalpana Jain, senior director at consultancy firm Deloitte.

Mukesh Ambani-led RIL operates the KG-D6 block with a 60 per cent stake, while BP has 30 per cent interest. Niko Resources of Canada has the remaining 10 per cent stake.

“To quote the prime minister on improving investor confidence, there is a need to send out the right signals to major investors in the Indian E&P (exploration and production) story about a transparent investment climate,” Jain adds.

RIL did not reply to an emailed query related to the D6 block.

The current year was also marked by differences between the petroleum ministry and RIL on issues ranging from restricting cost recovery to falling output from the D6 block. In the latest cabinet reshuffle, the prime minister shifted Jaipal Reddy from the petroleum ministry to the ministry of science and named Veerappa Moily the new oil minister.

“The government and the company (RIL) will continue to engage in understanding each other’s point of view and make way for further exploration and production activities,” according to Deepak Mahurkar, leader (oil and gas) at Pricewater-houseCoopers India.

Jain also expects domestic gas prices to see some upward revision in the near future, which will not only provide a better revenue realisation to E&P companies with gas finds, but also bring significant revenue to the government.

While 2012 saw some bold moves by the government in the form of raising diesel prices and capping the number of subsidised cooking gas cylinders at six per household, it is under pressure from allies and other political parties to revise the decision.

At best, the government can increase the cap on gas cylinders, but it should ensure it is a subsidy neutral exercise by hiking prices of diesel further. New hopes, however, have been kindled with the proposed launch of direct cash transfer to beneficiaries of kerosene and cooking gas subsidies.

Estimates point to a likely annual fuel subsidy saving of Rs 15,000 crore if the scheme works well.

Government-owned oil marketers — Hindustan Petroleum Corp Ltd, Bharat Petroleum and Indian Oil — are the main sufferers of the subsidy mechanism due to delayed compensation that triggers huge borrowing and interest burden. “For us, these are tough times. We are doing everything possible even this year. In terms of physical volumes, our performance has been outstanding. It is only external factors like subsidy and cash compensation that cause problems,” says R S Butola, chairman of Indian Oil.

The regulatory regime related to operating oil and gas E&P blocks is also expected to be tweaked in 2013, to bring greater clarity. Recommendations of the Rangarajan committee, formed to review existing production sharing contracts (PSCs) that guide the E&P operations, are expected to come shortly.

According to Jain, there are a few aspects of PSCs that need some introspection. First, PSCs are production sharing contracts, not profit sharing.

“India is not a prolific oil producing country attracting the oil majors. Hence, there is a need to balance the incentives and the administration of the regulatory framework, to attract the capital and technology required to exploit the riskier deep water, shale and unconventional oil deposits available in the Indian geology,” said Jain.

Year 2012 also saw the biggest investment abroad in the sector by ONGC Videsh Ltd (OVL), the foreign arm of the state-run explorer Oil and Natural Gas Corp.

OVL acquired an 8.4 per cent stake in a Kazakhstan oilfield from ConocoPhillips for $5 billion (Rs 27,530 crore today). More such deals are expected in 2013.

Mahurkar said the deals were expected to be in the nature of induction of technically sound global E&P companies into deep water blocks of companies like ONGC and Gujarat State Petroleum Corporation Ltd, and investment in equity oil by firms such as ONGC, Oil India Ltd and private oil companies like Cairn India Ltd and RIL.

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