It was in 1999, in the face of years of stagnating oil and gas production and a mounting import bill, that the country launched the New Exploration Licensing Policy to attract domestic and foreign investors to bring in frontline technologies to the exploration of oil and gas. This was the first time that India offered hitherto unexplored deepwater blocks, requiring huge risk capital and state-of-art technologies for exploration. The terms and conditions of NELP were formulated by the Government to compete globally with offer terms elsewhere in the world in order to attract the best in both investments and technology. Over 250, Blocks including <br>KG D6</br>, were consequently awarded by following an open International Competitive Bidding system. Yet, 116 discoveries later we find that a mere 6 producing anything.
For all the noise in the media about the costs of the project and declining production, KG D 6, sadly does represent the first of its kind of project in the country. For all its detractors, and they seem a dime a dozen these days, and with all due apologies to ONGC and its untiring efforts as the flag bearer of the country’s exploration efforts so far, there are no similar projects in the country ---so no benchmarks on costs. However, benchmarks on under-performance there exist aplenty – beginning with the Neelam fields, to the redevelopment of Mumbai High; not to forget that truly Imperial venture in Russia. And all these are not even been deep water fields!
Therefore given these high and mighty precedents it is pernicious indeed to suggest that D1D3 be singled out for penalties on account of underperformance. Even if some of us pretend not to understand the nature of the business let us at least get a level playing field out there. Even more pernicious are demands that that the cost of production must be made the determinant of the price of gas.
Wisecracks advocating cost plus pricing forget that since its inception, the Production Contract Regime followed in India expressly and deliberately mandates a market determined rather than a cost based price for both oil and natural gas. The same pricing regimes and the same contracts govern the exploration and development of oil and gas with no difference between the bid terms of the two. Those who glibly advocate cost based pricing for gas should therefore legitimately be demanding a roll back in international prices for oil once it crosses $ 65 a barrel.
In a PSC regime, such as the one now adopted in India, a contractor takes all exploration and development risks. In case he does not find any producible oil and gas the entire exploration investment is a loss exclusively borne by the contractor rather than the Government or the taxpayer. E&P players therefore account for sunk exploration costs by working on the basis of a global portfolio which balances economies across countries and regions. Commercial activities happen on a rolling basis as the results of future exploration plans can never be known in a business in which the inputs are determinable but the outputs highly probabilistic and dependent on the vagaries of the international market. Given the inherent uncertain nature of the oil and gas business, cost plus regimes everywhere (including in India) have time and again proved extremely inefficient, slow in adapting to technology changes, and prone to passing on mounting capex and opex burden onto consumers as the cost of managerial and technological inefficiency. After years of experimenting with cost plus regimes for oil and gas only to see production first stagnate (with the promise of impending decline), India thankfully, abandoned all cost plus hangovers in favour of a market related regime that could be globally competitive.
Today with a 74% import dependence on imports of hydrocarbons which will only increase with the years, the country needs to produce not just 6 but several hundred discoveries (a few dozen already existing) before it can congratulate itself on being able to produce more gas than it can use. We may have once flattered ourselves by dubbing the Bay of Bengal the North Sea of Asia but as the experience of NELP has shown there are no investors queuing up to explore it just yet. Before we gloat over the huge potential of the East Coast let us not forget that after D1 D3 in 2002, we have had to wait almost eleven years for the recently announced finds in Cauvery and MJ1.
If the professed burden of the Government is to use its approval functions under the PSC to keep gas prices low in order to save on subsidies then the proposed solution is itself bound to flame the very problem it seeks to eliminate. To understand this a few comparisons are in order: International crude prices of $ 100 a barrel represent in energy terms a price of $ 16 a mmbtu; diesel in Delhi today sells at an equivalent pump price of $ 23 a mmbtu, while six cylinders of subsidized LPG is bought everyday by housewives in Delhi are $ 12 per mmbtu. The remaining cost $ 24. Natural gas prices on the other hand range from delivery point prices of $ 4.2 per mmbtu to the $ 8.4 proposed by Rangarajan. Is that too high?
Ultimately, gas prices unrelated to markets only encourage the flight of investments to alternative businesses or more market friendly destinations. Today it is not just private investors who shy away from investing in unpredictable markets where policy uncertainty clouds long term risk taking - State owned oil and gas companies flush with funds are equally aggressively scouring overseas for higher returns in more market friendly destinations to limit price risk exposure in their own home countries. The expected consequence is that with declining domestic production, consumers who for immediate short term gains demand cheap gas will find themselves forced to shift to more expensive alternative fuels as supplies dwindle. Don’t forget that not to long back, in 2008, Fertilizer companies found LNG at $ 24 per mmbtu far cheaper than alternative naphtha.
Before one begins glibly advocating the interests of free loaders on the country’s huge and unending gravy (subsidy) train it is best to remember that the price of free gas is not merely no gas but a debilitating dependence on international markets as well.
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