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Mr. R.S. Sharma, Head, FICCI’s Hydrocarbon Committee

12 Jan 2016

‘Domestic E&P industry needs to be incentivised’

Mr. R.S. Sharma, Former Chairman, ONGC, and Head of FICCI’s Hydrocarbon Committee, shares his outlook on the oil and gas sector, issues being faced and what to expect in 2016. Excerpts.

What is your outlook for the oil and gas sector in India going into 2016?

The current scenario does not give the desired comfort for the investors. India as you know is hopelessly dependent on imports. Now with 78% of our consumption based on imports, I feel it is a very precarious situation. No other emerging economy of our size has so much of import dependence for oil and gas consumption. Countries like Japan, Korea etc are wholly dependent on imports but these are industrialised nations. Then they have plenty of exports to balance downsides of import dependence. In our case, our balance of trade is negative. India’s per head primary energy consumption is one-third of the global average. That means that the domestic demand itself is going to grow exponentially in years to come. So we do not have domestic resources and too much of import dependence is not good.

We are very fortunate that oil prices in the last one and a half years have constantly come down. That gives a lot of comfort in terms of our fiscal deficit and balance of trade and some relief in terms of exchange rate. Imagine if prices were ruling the same, our exchange rate would have been much worse, our balance of trade and due to heavy under-recoveries on petroleum products our fiscal deficit would have been in much worse shape. But this situation is not likely to continue in the long run. In the short run, as of now sentiments are low; demand supply scenario is in also in our favour means demand is comparatively low, supply has been more so prices have been going down. But it does not conform to fundamentals. In the long run, nobody would continue to sell less than the cost of production. Prices are bound to rise. It could be six months or one year or longer. We need to have more and more self dependence and E&P sector should be given all kinds of incentives for growth which is not happening as of now.

If you look at gas price scenario, we are celebrating that we have successfully negotiated with Qatar to reduce the LNG price by almost 50%. But this price of around $7 per MMBTU which we will be giving toQatar, why can’t we give that price to domestic industry. We have discoveries in our own backyard. Gas discoveries made by ONGC, RIL and GSPC would be viable at this price. By doing so, we will do more of ‘Make in India’, will generate more employment in India, our import dependency will reduce and our precious foreign exchange will be saved. So what is the rationale for not giving that price to domestic production? What I hear is, yes, we are doing something. We hear that market determined price will be given for new discoveries, how would then we justify this? So long it is ONGC, GSPC, it is ok. But now that there are going to be other private players, there would be people like Arvind Kejriwal who will be after their breath accusing them of favouritism. So there is a need to take a conscious call. But it is expedient that the domestic production from existing fields should be given a price equivalent to the lowest of the import parity price of LNG of spot cargoes which would be around $7-8 per MMBTU.

Even on regulatory reforms, nothing seems to be happening. The last NELP round was conducted five years back. Nobody knows when the next will come. They are only giving draft regulations asking for comments. Even the marginal field policy was announced long time back, but we do not see any progress on ground. So how things will move? Hence, as far as outlook for 2016 is concerned, I am not positive under the prevailing circumstances.

Several reforms have been proposed by the government in the upstream sector such as such move to a uniform licensing policy, an open acreage system, market price for gas and clearing the way for ONGC and Oil India to surrender marginal fields for open bidding that they deem uneconomical because of the fuel subsidy sharing mechanism. What is your take on these reforms? How has it impacted investor sentiments?

The uniform licensing policy is very good in intent. Immediately, the next round should be launched. Open acreage system is very good. I was a member of the Kelkar committee which has all these recommendations. With respect to providing market price for gas, for new gas it is ok, but what about existing discoveries? Does it mean that existing discoveries will remain on ground? ONGC has announced Rs 50,000 crore investments to develop east coast. But where is its viability? Viability will come only by giving market determined price to existing discoveries. On marginal fields, there has been a lot of similar talk since last seven-eight years. Simple announcement is not good enough, there has to be some implementation.

In wake of lower crude and natural gas prices, what should be India’s strategy to meet its energy requirements? Do you feel it is the right time to aggressively scout for acquisition of overseas assets?

That has to be there. That is the intent they have given. But overseas assets are just not available on the shelf. This is the time they should build strategic reserves. We have created three underground strategic reserves at Mangalore, Visakhapatnam and another location at Karnataka. But none of them is operational as connecting pipeline is not there. All of these hurdles should be removed. And this is also the time when we should expand our strategic reserves as whatever reserves we have is only sufficient to last 15 days consumption. China has already done that and has filled up their strategic reserves. This is the time to buy crude oil and store. Also I am worried that now since crude prices are low, complacency has set in. No one is realizing the urgency to fast track the reforms process. Lot of announcements have been done but implementation needs to be happening.

Right now the cost of services is low, charter hire of rigs is low, oilfield services costs are low so they should go in a big way for investments for the future, because as I said, these low prices are not going to prevail in the long run. So strategy should be to continue making investments for future, fill up strategic reserves and go for acquiring overseas assets.

Taking of acquiring overseas assets, India and Russia are eagerly looking to work together in the hydrocarbon space with companies like OVL, IOC and OIL already deciding to pick up stakes in oil and gas assets in Russia. How do you analyse this development?

Yes, Russia has opened up their hydrocarbon sector to India. Of course, Vankor type of acquisition is something we should do. Russia is also going through a financial crisis so they would be happy to have investments. Likewise, in Iran, efforts should be made to give Farzad-B gas field to consortium of ONGC, IOC and OIL Not just in Russia, but in Iran and wherever there are similar opportunities, they should be pursued.

Do you feel the Make in India programme has worked for the oil and gas sector so far?

So far, no. We do not see any action on ground. As policy intent, it is very good. But nothing has happened on ground so far. In this context, the meeting taken by the Prime Minister recently with global experts shows commitment and gives lot of comfort to international community to come and invest in India. But I feel that actions should be fast tracked. Except positive intentions from the government, I do not see any activity in ‘Make in India’ so far.

Do you think it is the right time to go for developing oil field services?

Yes. Infact, in the Kelkar committee, we had said that there should be one oilfield cluster on the east coast, one on the west coast. And like in case of SEZ, infrastructure should be created by the government and companies, both global and domestic, should be asked to set up their shops here and from here they can cater to outside requirements as well, just like it happens in case of the BPO services.

There has been a lot of talk on using environment friendly fuel such as CNG to reduce growing pollution in cities like Delhi. Similarly, the Petroleum Minister has recently suggested shifting from BS-IV to BS-VI grade fuel directly. As per you, what should be the right strategy to tackle pollution in the long term?

Here I do not have technical knowledge. CNG is good, but where is the gas? Today, contribution of natural gas to India’s energy basket is only 7%, globally it is 24%. There is every reason to promote consumption of natural gas. There are also the commitments made by India in the COP 21 summit held in Paris in December. So the gas industry has to be developed and domestic gas reserves should be exploited at the earliest. Switching over from BS-IV to BS-VI is a good move, but whether it is feasible or not, I can’t really say as Auto industry has to fall in line.

What are the key demands and expectations of the oil and gas sector from Budget 2016?

It is ridiculous that OID cess of Rs 4500 per tonne is levied, which translates into about $10 per barrel. Out of the total revenue, $10 goes as cess and then there is additional charge of 10% royalty. Then, how do the companies survive? This cess was raised to 4500 per tonne when crude prices had reached $110 per barrel. The oil prices have crashed by 70% and there is every case for the cess to also be reduced by this extent. The cess has to be made ad valorem.

Then, natural gas has to be treated as mineral oil just like crude oil. Exploration has to be incentivised. It should be understood that exploration is not a revenue generating activity and should be exempted from service tax. Service tax is levied on revenue generating activity but exploration, per se, is not a revenue generating activity. Overall, intentions of the government are good but something must be done to translate intentions into implementation.