Shifting the energy needle in the right direction

Shifting the energy needle in the right direction
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A senior public policy expert recaps the progress made in India's petroleum sector and what more needs to be done for 'India Investment Journal'. In the over two years that the Narendra Modi led government has been in power in India, they have shifted the needle of policy on petroleum in the right direction. More needs to be done but the first few steps have been taken to reinvigorate domestic exploration and production; correct pricing distortions upgrade and strengthen logistics and distribution infrastructure; staunch leakages and minimise noxious emissions. Also, relations with the major petroleum producing countries have been improved and this has mitigated somewhat our exposure to supply disruptions. Prime Minister Modi inherited a moribund oil and gas sector. Domestic production was on a downward trajectory in part because the Ministry of Petroleum (MOPNG) had suspended NELP (exploration licensing rounds). This was in part because ONGC /OIL, the two public sector exploration and production companies, had cut back their exploration expenditures to finance the "under recoveries" of the downstream companies and in part because the price of gas had been set by the government at a discount to market levels and that had deterred companies from developing and producing discovered fields. Refining and marketing was also in bad shape as the downstream companies had been drained of cash by the politically populist decision to subsidise kerosene, LPG, diesel and petrol. In consequence, there had been no substantive allocation of resources towards the upgradation of logistics and distribution infrastructure or for R&D. And finally, the officials were comatose. They saw less risk in the act of "omission" than the act of "commission" given the sword of Damocles of the CBI , CVC and CAG that hung over their heads. Files were either shelved or passed on. But few were signed. Two years on this situation has changed appreciably.

One, the government has come out with a finely tuned model for reinvigorating domestic exploration and production. The terms of the recently announced "Discovered small fields round" are competitive, pragmatic and flexible. These terms include an open acreage licensing policy; market related pricing of oil and gas; the freedom to market without encumbrance and written and verbal assurances of fiscal and contract stability. In addition, the government has now permitted companies that have a petroleum exploration license for conventional hydrocarbons to explore for unconventional hydrocarbons under the same terms and conditions. And also 100 per cent foreign direct investment (FDI) into exploration through the automatic approval route. Of course, it remains to be seen whether all these changes will spark investor interest. I suspect not under the present low oil price market conditions. But that said the conditions are now in place for enhanced exploration activity if and when prices do move up. Two, the government has fully deregulated the prices of diesel and petrol, capped the supply of discounted LPG cylinders and reduced the subsidy on kerosene. It has also replaced the leaky Public Distribution System (PDS) with the direct cash transfer of benefits on the platform of the UID (unique identification system). As a result, IOC/ HPCL and BPCL have now been restored to financial health; wasteful consumption has been cut back and fuel adulteration has been reduced. One of the most damaging consequences of the erstwhile policy of subsidisation was the "diesalisation" of the economy and air pollution caused by mixing kerosene into diesel. Both these trends have, to an extent, now been arrested. Three, the government has diversified its sources of crude oil imports. Earlier, the bulk of its crude requirements were sourced from the Middle East. Today, it imports also from Russia, Nigeria, Venezuela, Malaysia and Australia. Many of these countries are, of course, facing severe political, economic, and social challenges. The challenge of coping with a supply disruption remains therefore high on the policy agenda. In anticipation, the government has filled one strategic reserve cavern and a second is near completion. The PM and Ministry of Petroleum and Natural Gas have also been assiduous in strengthening bilateral relations and economic diplomacy. Four, steps have been initiated to amend the Prevention of Corruption Act, which has a clause that officials consider particularly pernicious. As a result of these assurances, files are now being signed. More, of course, needs to be done. A major lacuna in the petroleum sector is the inadequacy of the gas pipeline network. There are presently only two interstate pipelines and most of southern and eastern/north-eastern India has no gas connectivity. This inadequacy has to be corrected. For gas is the bridge fuel between the present of oil and coal and a future based on renewables (solar, wind and bio etc). Its usage should be encouraged for environmental and economic reasons. The private sector will not invest because of low returns so the task of creating a national gas pipeline grid rests with the public sector. The completion of this task should be a foremost priority.

Vikram Singh Mehta is chairman & senior fellow at Brookings India.

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