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RS Sharma, Head of Hydrocarbon Committee,, FICCI

02 Mar 2017

India’s policies for inviting overseas investments in E&P still arrogant

In an attempt to keep Infraline Energys’ readers abreast with the key issues and challenges engulfing the sector, Infraline Energy tries to bring forth the opinion of key personnel whose decisions and opinion play a vital role in shaping the sector. Please find below excerpts from the interview that Infraline Energy conducted:

The oil and gas sector has failed to attract lot of investments in the past. While the industry has been waiting for various policy interventions to improve the investment climate, things have not moved as per expectations. In this regard, RS Sharma, former ONGC Chairman and current head of FICCI Hydrocarbon Committee, shares his views on some of the recent developments in the sector and what we need to do to improve E&P industry.

Are you happy with the Union Budget announced on February 1?

There was hardly any mention of oil and gas sector in the Budget. The decision to increase energy storage capacity is not a very big thing. Existing reserves are for about 12 days, with further addition it will become 20 days.Reduction in customs duty for LNG is welcome. There is nothing else apart from this. However, there were lots of expectations relating to cut in cess on crude oil, clarifications relating to service tax etc. So how we are going to promote the E&P sector? Unless there is conducive environment, India’s quest to reduce its oil import dependence is wishful thinking and a pipe dream. Some radical measures were expected to be announced, but there is no announcement of these in the budget. There is no roadmap as of now. It was disappointing. Unless the government announcesan implementation roadmap, what is the message going to potential investors?

How do you assess the recent small fields auction?

Discovered small fields response has been miserable. ONGC and OIL were asked not to participate. One-third was then cornered by other PSUs and their subsidiaries. Then, none of the international players came, despite measures and packages announced which were definitely lucrative enough. I feel that India’s policies for inviting overseas investments are still arrogant on the lines of Russia and Venezuela. These countries are hydrocarbon rich countries; they can afford to be arrogant. We need to approach the global community with folded handsand request them to invest in India. In lieu of this, we should provide various facilities, ease of doing business, etc. Unless you do this, who will come?

But there were lot of new players?

Definitely. See, some of these fields are really very small and it is not worth for biggies to bid for that. And lots of oil field service providers have intention to become E&P players. Those companies have come for this. They can have global partners. So there has been some activity which needs to be welcomed.

Now the government plans to come out with auction of oil exploration rights by June. What is our take on this?

Yes, they are saying that in two or three months the government will come out with Open acreage licensing policy. But before that we need to create a conductive environment to attract big players, which, currently is not there. There has to be a radical reforms package to be announced by the government and they have to address that credibility will be honoured, there will be no mid-course changes in definitions etc. That has to be conveyed. We need to be more aggressive in our marketing and sending out word to the global community to come here and invest. E&P per se is a highly capital intensive and risk oriented industry. It has to be made clear to everybody that intention of the government is not to increase the current revenue but to promote E&P sector so that production will increase, which will increase government’s revenues in future and also reduce import dependence, promote Make in India and employment in India.

Who do you see the investment climate in the oil and gas sector today?

Oil and gas sector has not attracted any FDI in the last 7 years. Only FDI right now is Rosneft acquiring Essar. Because India is the only market globally which is growing, where demand is increasing. For them it makes lot of sense to capture the market here. In the retail business, they will evacuate crude, and refine and sell it here.But there is nothing in E&P. In downstream, Shell is there, BP has given its intent, Total is also reaching out. So all of them are sitting on the fence to jump this side as retail is a growing market. But due to various reasons, it is still favourable to PSU retailers. Even RIL and Essar are complaining that OMCs are being patronized.

The government is keen to have an integrated oil and gas major in India. There are talks of ONGC acquiring a majority stake in HPCL. What is your view?

The first and foremost thing is it is a cool divestment collection exercise by the government as the government has 50% holding in HPCL worth Rs 29000 crore. If that is taken over by ONGC, the government will receive its divestment proceeds. Also, it makes lot of logical sense for ONGC to get integrated in the entire value chain of business. Until now, ONGC was an upstream major with some downstream presence. With acquiring HPCL, ONGC will come into retail marketing and will have presence in the entire value chain. When you prepare the consolidated balance sheet, it helps in equalization owing to business volatility in upstream and downstream segments. So like any other international oil major, ONGC will become a truly integrated company. So t is an advantage to ONGC. Also, there is no downside for HPCL. Only disruption will be that CMD would get re-designated as MD and CEO, and there will be non-executive chairman from ONGC. The board and management remains as it is. Benefit to HPCL is they will be able to leverage ONGC’s balance sheet for their expansion programs and fund raising requirements. I feel this is synergy. It is win-win situation for the government, ONGC and HPCL. For ONGC to garner Rs 29000 crore for this acquisition will not be a big deal. With this, ONGC’s credibility will go high because of being a truly integrated oil company globally.

The renewable sector in India is fast picking up. Where do you see natural gas in this talk of clean fuels?

Definitely, renewables should be the first option but unfortunately even globally, renewable contributes only 14-15% to the energy basket. In India it is 6 to 7%. So even if it grows exponentially, it will not be enough as its base is small. This will not be enough to address growing energy needs of the country. In fossil fuel, most preferred fuel should be gas. So intention is good that we should have a gas-based economy. But domestic producer of crude oil gets import parity price, while gas producers do not get it. His benchmark price is that of gas surplus economies which are exporting. Why don’t we not give the same price to domestic producers at the rate at which we are importing LNG.It will increase domestic production and reduce import dependence. Only logic seems that there is a very strong consumer lobby from power producers and fertilizer companies and the government may be considering higher subsidy burden due to increase in input costs.

Where does oil and gas sector figure in the GST roll out?

GST rollout is planned from July 2017. But again there is huge apprehension in the oil and gas sector. Gas is out of GST, so are some of the major petroleum products, but input costs of the companies are in GST. How will they get cenvat caveat? Then, Fuel Oil, naphtha and ATF are part of GST, others are not. So how will accounting be done? There is lot of uncertainty.

Infraline Energy would like to thank the contributor for his/her valuable time and opinion shared on the topic.