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Govt must scrap Soviet-era controls if it wants investments to grow

Sunil Jain
oil sector, oil industry, ongc

Nothing exemplifies the gap between the reforms that the government claims have been done and what the industry perceives than the case of natural gas pricing. The government claims that market pricing is allowed for both oil and gas, but industry players insist this is not correct. Indeed, the issue came up several times last week, in the meetings held by both finance minister Nirmala Sitharaman and prime minister Narendra Modi.

In 2016, it is true, the government did raise the prices of natural gas to near-market levels, but with a catch: this applied only to new gas discoveries and that too gas which is produced in deep-water or ultra-deep water or in high-pressure-high-temperature areas. While such gas is to get paid $9.32 per mmBtu, gas from older fields or from fields that are not in deep/ultra/high-pressure areas is to get $3.69. This means over three-fourths of the country’s current gas production doesn’t get the market price but gets a price that is just around 40% of it.

So, when politicians/bureaucrats claim they have freed up prices, they are really talking about new players who have their gas fields in tough geologies. Similarly, while the government gives higher prices for extra recoveries beyond the average this is called Improved Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) this, too, has many caveats and it is only for projects going forward; while there are companies that pumped in chemicals etc from the day they began production so as to get EOR from day one, these companies cannot avail of this extra incentive.

But what politicians/bureaucrats miss is that if older oilcos, like ONGC, that produce the bulk of India’s natural gas, don’t get the market price, where will they find the money to invest to explore in new areas? Indeed, if producers get market prices, these additional incentives are not even required. And imagine the problem this causes. Firm A can be be producing X units of gas that are to be sold at $3.69 and Y units (from a new discovery but in the same field) which get $9.32 who is going to keep records of whether Firm A is depressing X and inflating Y, and even if it isn’t, who is going to believe it when the CAG or someone else makes this accusation?

It is almost as bad in the case of oil where, despite supposed pricing freedom, as a report from the Petroleum Pricing and Analysis Cell (PPAC) points out, ONGC gets around $10 per barrel less than what it could get if it was selling to refineries that were more sophisticated than the PSUs to whom it supplies a more sophisticated refinery extracts more value from the crude and so can afford to pay more. Indeed, Cairn India has been asking the government for permission to export its crude oil for several years only so that it can get a higher price than that paid by local refineries. In the case of oil, producers have ‘pricing freedom’, but not ‘marketing freedom’ which, though they sound the same, are really quite different. In this case, Cairn is free to get a market price from refiners it sells to, but since the government tells it which firms it can market to, and how much to each, the buyers manage to get a discount on a genuine market price.

Of course, before blaming oil sector bureaucrats for coming out with this half-hearted freeing of prices, it is important to understand their compulsions. Most of the gas that is sold at $3.69 per unit is sold to power and fertiliser firms. So if prices are raised by 2.5 times, both power and fertiliser costs will go up significantly; the same applies to both petrol and diesel, if producers are given market prices for their crude. So, unless the Soviet-era price controls are removed and this is a political call there is little the bureaucrats can really do. If they are to allow oil/gas prices to go up but the political establishment is not willing to allow prices of fertiliser or electricity, or petrol and diesel, to go up, who is going to pay the difference?

It is because of this need to keep prices low for one group of people that the bureaucracy then comes up with the solutions it does. If prime minister Modi was to say that he wanted market pricing so that correct investment decisions could be taken across the board, and that he would, if need be, pay a direct subsidy to those who needed to be subsidised, then the bureaucracy could take the right decisions.

India has a lot more oil and gas than most reckon and, at a recent conference, BP s India head Sashi Mukundan said their analysis of data suggested India could produce 100 tcf of gas, or nearly double the present estimate of how much gas India can produce. And, he said, if Indian oilcos used better recovery techniques IOR and EOR this alone would give another 4 billion barrels of oil, a figure that is roughly the current estimate of how much oil India can extract. At this level, India s 2040 import-intensity for gas will fall to around 50% and for oil by 3-4 percentage points. All of this, however, presupposes a policy environment that is not full of caveats and subject to the interpretation of sundry bureaucrats; and that’s apart from the various issues with the taxman like taxing of royalty payments to the government.

Nor is the oil and gas sector the only one where this subsidy overhang is causing a big policy problem. In order to give extra returns to so-called small savers, the government mandates high returns on PPF/EPFO type of savings; this ensures banks keep deposit rates high and results in lending rates remaining high despite RBI s repo rate cuts. Similarly, the need to subsidise households and farmers means industry/exports has to pay 2-3 times the cost of power, and that hurts their global competitiveness; as a result, imports rise and exports stagnate. You can blame the bureaucracy, but eventually it is a political call that Modi needs to make.