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R.S. Sharma, Chairman and Managing Director, ONGC

13 Mar 2013

There is no need for CAG audit under new system

The word on the Rangarajan Committee is out and the Government is actively considering the proposals for speedy implementation. In this context, R.S. Sharma, former Chairman and Managing Director, ONGC and Chairman, Hydrocarbon Committee, Ficci, shares his views with Neeraj Dhankher on the various recommendations made by the Committee and what it means for the oil and gas industry. Excerpts:

Do you agree that the recommendations of the Rangarajan Committee on cost recovery and gas pricing are a win-win for all stakeholders?

I feel that the recommendations remove a lot of uncertainties which are prevailing on gas pricing. The uncertainties also raise concerns about litigations and disputes. So to a large extent, the recommendations
have addressed these concerns. I would say this is a better proposition than the existing situation where we have seen various disputes because of ambiguity in the system. Coming specifically to the recommendation on removing the cost recovery, even today there is no cost recovery system for CBM blocks. They operate under a production linked payment model and these recommendations are on
the same lines. I feel the formulation is much simpler.

Sectors like fertilizer would be happy to get cheap gas. For them it is a pass through. The burden comes to the government in form of subsidy. It has to take a call on whether to incentivize domestic production or to continue remaining dependent on imports.

There has been anxiety in some quarters that with no cost recovery how would the companies recover their expenditure on exploration and in what time frame. I feel the production linked payment system would also work well, wherein the bidders will have to offer a model which will be evaluated by the government based on best offer received after which they would be awarded blocks. So in case of high exploration expenditure coming upfront, if the company wants to recover it fast, it can offer a formulation indicating say for next two years it may not like to do any production sharing with the government. So I feel that doing away with cost recovery is a win-win for both the government as well as the bidders. The government won’t have to go into issues relating to verification of cost, audit and gold plating, while the companies will not be subjected to unwarranted scrutiny for cost recovery.

Does removing cost recovery send the right signal to bidders?

See, any investor will be happy to come and invest till it is clear about the fiscal regime and revenue sharing model. In the current uncertain situation none would like to come. According to me, the recommendation is certainly a better proposition. While the bidders would be happy if there is a cost recovery so that they can recover all exploration costs upfront, or in a staggered manner, but in a system of production linked payment, they can still do the same thing indirectly. It is a welcome change as against the current formulation.

On CAG audit, the panel said blocks with low value could be audited by panel of auditors formed by CAG and for high value blocks, the official auditor should audit directly. Do you favour such audit mechanism? Won’t it also involve performance audit as well which has been opposed by most E&P companies?

CAG audit is one issue which I feel is an aberration because when there is no cost recovery there should not be an incidence of audit. To my mind this committee could have and should have avoided bringing the reference of CAG audit as that is an issue where the call is to be taken by CAG as an Institution. What view they take subsequently is to be seen. But I feel there is no need for CAG audit. International E&P companies, especially those coming and operating here would not like to open their books of accounts for any CAG scrutiny especially when there is no cost recovery. So what will the CAG audit do? To my mind, the CAG audit should be done away with.

The committee has suggested mandating a price of domestically-produced natural gas at an average of international hub prices and cost of imported LNG. In your opinion, is the new gas pricing formula suggested too complex and non-workable?

I find there are complexities in the formulation especially with regard to availability of published data. While published data exists for US and European gas price, the same is not available for the JCC model where hundreds of cargoes are imported in a year. But I presume the committee must have given a thought to this and must have applied their mind. As per my understanding, there are likely to be complications and complexities in actually calculating the gas price based on the formula suggested.

The panel has called for doubling of gas prices for NELP gas. How will it impact producers like ONGC and private companies like RIL?

I feel this is a very legitimate recommendation. Today everywhere the gas price benchmark price is higher, more so in case of LNG importation. LNG importation is happening at substantially higher prices. Even in case of the Dahej terminal of Petronet LNG Limited which has a long term contract for sourcing LNG, price is currently close to $10 per mmbtu. The gas price suggested by the panel talks of the future. There has to be adequate incentive for the producers. The consumer may like to have a low price, the government may also offer low price because of consumption in power and fertilizer where there are subsidy issues. But these expectations may not be realistically correct. The government has to see that there are adequate incentives for new players to come and bid in India. Unless it is there, why would they come to India? They would rather invest the same money elsewhere where gas prices are higher. So I feel that a realization has to come where the consumer has to pay a higher price as historical low price is not going to prevail in future.

The recommendation is also welcome from the side of producers. NELP gas today mainly comprises D-6 gas. ONGC is producing from nominated fields. All producers such as ONGC and RIL will be happy even though there are some concerns that the price should have been even higher. But I feel the suggested formula and mechanism balances the expectation of producers and consumers in a reasonable way.

Gas producers like Reliance are not happy with the proposal as it apparently does not reflect risks involved in exploration. Your views.

If you look at the Production Sharing Contract signed, it says that producer will have freedom to market gas based on government’s gas allocation policy. Under that, RIL is currently getting a price of $4.2 per mmbtu, which, as it is, is due for revision in a year’s time. At least there is a comfort and realization now that there is a need to increase the price for gas that is being domestically produced, especially deepwaters and other marginal discoveries which will become viable only at a higher price. For example, ONGC’s KG-98/2 block production would not be viable at a price of $4.2 per mmbtu, but only at
$6-7 per mmbtu.

But the producers have been asking for market-linked pricing and the suggested exclusion of transportation and liquefaction costs from the global price to arrive at the benchmark Indian arm’s length price clearly has not satisfied them.

I feel it is reasonable to not include transportation cost of LNG in gas price. Once we are taking a benchmark price in other economies, what is relevant is the price of gas production and liquefaction. That is the view taken by the Committee. At least there is clarity about the way it would be calculated. Then this averaging of price as of now is working around $8 per mmbtu, which I think is quite reasonable.

Is the timeframe of price revision fter five years reasonable?

The report says that after five years this (gas prices) should be aligned to market forces. So I feel that it is quite reasonable. When there is stability in system in course of time, it should be slowly aligned to market prices.

But the committee talks of having uniform prices for gas across the country?

If one looks for perfection it is not there. Here again even gas produced from onshore and deepwaters will have the same price. Costs are hugely different for production from onshore areas, offshore areas,
deepwater and ultra deepwater, but this recommendation refers to uniform price for all fields.

It is claimed that increase in gas price from $4.2 to $8 per mmbtu, as suggested by the committee, will have a detrimental impact on user industries like fertilizer, power and CGD sectors. Do you agree?

The City Gas Distribution sector is viable even with LNG spot importation price. CNG, which is used mainly in public transport, will of course be impacted. But this realization has to come that the consumers will have to pay the market determined prices. Today, in the whole petroleum sector, and to some extent coal sector, consumer wants cheap subsidised product. But it is a harsh reality. We are hugely dependent on imports. How can anyone import at a high price and sell cheaply? Then there are not adequate incentives for domestic production to go up. So this situation has to be balanced. In case the government continues to say that they will pay low price, then the domestic gas production will fall in course of time and all investments which are expected to be made will go outside the country. That
doesn’t make good sense.

Sectors like fertilizer would be happy to get cheap gas, even free of cost. For them it is a pass through. The burden comes to the government in form of subsidy. But then the government has to take a call on
whether to promote and incentivize domestic production or to continue remaining dependent on imports in times to come. As per me, it is better to incentivize domestic production.

An extended tax holiday of 10 years, as against 7 years already available for all blocks, has been recommended for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500 metres. Your comments.

This suggestion is absolutely welcome.

The committee has recommended extending the timeframe for exploration in future PSCs for frontier, deep-water (offshore, at more than 400 m depth) and ultradeep water (offshore, at more than 1,500 m depth) blocks from eight years to ten years. Your comments.

It is a step in the right direction as exploration takes long time in deepwater blocks and frontier areas. So there has to be a longer time for exploration in these areas.