New oil and gas regime: Action in the interim!

The Indian government has decided to craft a ‘perfect’ exploration licensing regime which will unify and simplify the policies for oil and gas, coal bed methane and shale.  Such a move is designed to eliminate the ‘cost recovery’ factor that is at the root of troubles and dispute with Reliance

There is a lot of confusion and contradictions, apart from compromising factors, which are involved in the government’s move to finally nail down an "acceptable" price formula for gas produced in the country. It is interesting to bear in mind the price of gas, which began at $2.40 per mmBtu and then moved on to $4.20. Later, when the group of ministers (GoM) deliberated over the Rangarajan Committee's recommendation, which proposed an $8.40 per mmBtu, Veerappa Moily, the petroleum minister came out with a compromise formula price of $6.67. But, this was overruled and the price of $8.40 per mmBtu was fixed effective from April 2014.

In the meantime, the actual output of gas, which was projected to reach 80 mmscmd had climbed down to a trickle at 14 mmscmd by 2013. These are the production figures of KG-D6 of Reliance, who has been demanding a higher price, attributing the fall in production to technical difficulties faced, almost suggesting that the well is drying up. They would rather call this a "geographical surprise". And, it may be so.

It is sad but the fact remains that technical assessments made by Reliance were submitted to Director General of Hydrocarbons (DGH) and additional data that its experts sought from time to time from Reliance were also provided. DGH neither challenged Reliance’s stand nor gave its concurrence.

Therefore, it would appear, prima facie, that DGH collected a lot of data but did little on their own to verify the claims made.  Third party "technical" experts who made independent surveys at site did not even indicate the prospect of drying up so soon. Regrettably, even now, we do not know whether it is a fact or not.

But the fact remains that, as the fall in production began to be noticed, Reliance did not apply any efforts in drilling up new wells and got bogged down to discussions with the government on the appropriation of expenditures—the cost recovery factors!

In the interim, the hardest hit was the fertiliser industry, the backbone of this agrarian country. Both fertilisers and diesel oil used to pump out water in the field are heavily subsidised, with the total exceeding a few billion dollars annually. To feed the fertiliser units, LNG (Liquefied Natural Gas) has to be imported at enormous costs - between three to four times the local prices.

The fertiliser industry needs 47 mmscmd, of which one third, or 16 mmscmd, came from ONGC and Oil India Ltd, with the balance to be supplied by Reliance. So, when

Reliance could not do so, LNG had to be imported at higher prices and supplemented by direct import of fertilisers too.

The power generators, who still get some "gas" have sensibly moved to a greater dependence on indigenous coal supply, supplemented by imports from Indonesia, Mozambique and Australia. LNG, again, has become another standby source for them, at higher cost.

Set against this background, now the government has decided to craft a "perfect" exploration licensing regime which will unify and simplify the policies for oil and gas, coal bed methane and shale. Such a move is designed to eliminate the "cost recovery" factor which is at the root of troubles and disputes with Reliance. No time frame has been set for this regime to be announced, and it remains to be seen how the main producers react to this policy. Also, more importantly, we need to wait and watch how this policy is welcomed by foreign investors.

As mentioned before in these columns, the government needs to direct the environment ministry, Ministry of Environment and Forests, to tweak their policies to permit all oil and gas producers to increase their production from existing sources and take on war footing to explore new areas.

This will take us to Cairn India who has been waiting for months to increase their production, but have been waiting for "clearances"; so are others like ONGC, Oil India and Gujarat State Petroleum Corporation (GSPC). Reliance has been waiting for the price increase and cost recovery clearances.

All these are contingency measures. In the long term, the serious issue is whether India should plan expansion of fertiliser units in the country? No, far from it. If anything, they need to rethink, seriously, in terms of joint ventures in Qatar, Oman, Nigeria, Iran, Iraq, Saudi Arabia and the United Arab Emirates. While Qatar and Oman are already supplying urea, what is required is to increase this production and also set up new units to cater to the Indian needs in the years ahead. This would help these countries to industrialise and also use the gas domestically, thus avoiding the need to ship it to India.

Likewise, it would be prudent to obtain shale oil and gas from USA and Canada rather than making plans to explore the prospects in India.  The only exception will be the Coal Bed Methane, which is going waste, untapped, provided there are no un-surmountable environmental obstacles. 

It would be in national interest to handle all these matters on a priority basis not just by pushing them around to set up various groups and committees for discussions. All matters related to this industry cannot wait and be subject to inordinate delays in deliberations that we have experienced so far.

Finally, the price factor should be based on the national currency called the "Rupee", and not the Dollar, and a compromise solution applied for the unsupplied portion of gas from Reliance, because they may have genuinely faced obstacles from Mother Nature, on which no one has any control! In the process of doing so, the DGH needs to be manned by truly qualified and experienced people of international repute and standing as this department needs to be overhauled completely.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)