Economy

An inch forward, but miles to go

Not hot enough: India is still not among attractive markets for global giants who would rather invest in West Asia or North Africa, even though domestic private sector participation is set to rise, says K. Ravichandran   | Photo Credit: ESSAM -AL-SUDANI

Even though the recently concluded bids for hydrocarbon blocks under the new exploration policy had attracted healthy interest, there is still a lot to do before domestic oil and gas production is enough to actually reduce India’s dependence on imports, or before a gas trading hub can be established in the country, according to industry players and analysts.

The Directorate General of Hydrocarbons (DGH) recently announced the completion of the first round of bidding under its new Open Acreage Licensing Policy (OALP), a part of the revamped Hyrdrocarbon Exploration and Licensing Policy (HELP) that was launched in March 2016. The DGH said that it had received 110 bids for the 55 blocks on offer, with the private sector also actively participating, an indication of the renewed interest in the sector.

‘Addressing concerns’

“Overall, I think the government is very serious about addressing the concerns of the industry,” K. Ravichandran, senior vice president at ICRA said. “So, certainly we are moving in the right direction in terms of attracting investments [with policies such as HELP and OALP]. And now with oil prices going up, the sentiment can only improve. So, I see more investments happening, especially from the private sector.”

However, Mr. Ravichandran also added that several of the blocks on offer were small and hence the production potential from them was unlikely to change the oil production or import scenario in the country.

“Our demand growth is very buoyant,” Mr. Ravichandran said. “If you look at our petroleum product consumption, India is one of the fastest-growing markets in the world.

Auto fuels are growing at 8-10%. In the big four — LPG, ATF, petrol and diesel — India is growing in the high single digits. Even if domestic production were to increase, we are talking about 3-5% at best in the next 3-5 years, so that won't make a difference to the overall import dependence of the country.”

And, even with domestic private sector participation expected to increase, India is still not one of the more attractive markets for global giants such as ExxonMobil or Chevron, who would rather invest in West Asia or North Africa, he added.

That said, there does seem to be interest from West Asian companies in investing in India’s refinery sector, with Abu Dhabi National Oil Company reportedly expressing interest in buying stake in the planned refinery-cum-petrochemical project in Ratnagiri, Maharashtra. This follows Saudi Aramco last month signing an agreement to take up a 50% stake in the project.

Rules implementation

However, more than policies, the main problem in the Indian hyrdrocarbon sector has been the implementation of the rules. Laxity on this front has affected both the oil and gas sectors.

A case in point regarding the enforcement of the rules is the fact that state-run gas company GAIL (India) has a monopoly over the marketing and transportation of natural gas, which the private sector said leads to discriminatory and unfair practices.

Even the Ministry of Petroleum and Natural Gas has asked the sector regulator, the Petroleum and Natural Gas Regulatory Board, to look into the matter and see how best to unbundle GAIL’s marketing and transport businesses.

On GAIL’s side, its officers’ association has written to the Prime Minister saying that there was no discriminatory pricing and that the policy framework was such that such malpractices could not take place.

“In principle, there is a set of rules to prevent discriminatory practices, there is the PNGRB that is meant to regulate the sector, but we realise that the PNGRB did not have a quorum for quite a long time,” Ajay Shah, Vice President of Shell Energy Asia told The Hindu. “It was only recently that Mr. [Dinesh] Saraf has come in [as chairman] and we have a body of people that has good industry knowledge and expertise. There was a real hiatus for a while there.”

“One of the things we bump up against sometimes is access to infrastructure,” Mr. Shah added. “What we see in most parts of the world is that the transportation business [of oil marketing companies] is separated from all other things because it is a natural monopoly.

So, in other countries you have a regulated, rule-based system that allows access without any discrimination to anyone who wants to transport products in that infrastructure.”

“The issue is also about the enforcement of the rules,” Mr. Shah explained. “The rules are pretty good. How do you make sure that the situation is genuinely non-discriminatory? What you want to give the customer, to make the market-place more dynamic, is more choice. And by having non-discriminatory access to infrastructure, you give the customer more choice.”

Price effect

Another big issue that is gripping the oil industry in India is the fact that global oil prices are at elevated levels, leaving oil marketing companies in a quandary about whether to pass on the increases to the customer or absorb the loss and offset it against higher inventory gains due to rising prices.

From April 24 onwards, Indian oil marketing companies had decided not to pass the oil price increases onto the customers.

The global price of oil has risen about $3 per barrel since then. “There will certainly be an impact on revenues in the first quarter,” Mr. Ravichandran said. “But companies will have flexibility to recoup that in the rest of the year. While they are free to fix their prices, even if international prices were to fall, they can retain their retail prices at a higher level. Also, inventory gains due to rising oil prices will also help them offset the losses. Net-net, I don't see a very big impact on the bottomlines of the oil marketing companies,” he added.

Gas hub

On the natural gas side, the Minister of Petroleum and Natural Gas Dharmendra Pradhan has often mentioned that he is planning to soon turn India into a gas trading hub. However, private sector players and industry analysts have pointed out that there is a long way to go before this becomes a reality.

“GST is another element of the level-playing field that's not there,” Mr. Shah said. “If, when you cross a State border, then you get imposed a VAT that is not recoverable on this side, then suddenly you have incurred a cost just because the customer is over there and not here [in the same State]. I don't know how you would implement a gas trading hub without bringing gas under GST. The exchange or hub price is this, but it's different if you are in a different State... That doesn't feel like the right answer.”

Mr. Pradhan has repeatedly appealed to the GST Council to include petroleum products under the new indirect tax regime. However, no such decision has yet taken place.

“It would be easier to bring gas under GST than oil because gas is a much smaller part of the economy and so it won't have that much of an effect,” a senior official in the Ministry of Petroleum and Natural Gas told this newspaper on the condition of anonymity. “But oil will have a big effect because of the excise duty collections that are currently being made.”

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Printable version | Oct 23, 2020 3:17:18 PM | https://www.thehindu.com/business/Economy/an-inch-forward-but-miles-to-go/article23874501.ece

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