The complex case of India's hydrocarbon industry

With core sector growth slowing to 2.9 per cent in March, India's infrastructure sector is yet again impacting its economic growth. The mining ban that hit iron ore and steel production, the fuel supply constraints faced by power sector, and the pricing issues impeding investments in oil and gas sector have affected downstream infrastructure growth. In a three-part series, Business Standard looks at what is wrong with core sector.

From pricing woes to hurdles in clearances and long-standing disputes, challenges the oil and gas sector in India faces are galore. Little wonder the country produced around 176.9 million tonnes (mt) of crude oil in the 11th five-year Plan period ended March 2012 against a projected 206.8 mt. On the other hand, crude oil imports increased dramatically by 149 per cent to 184.5 mt in a decade to 2012-13, making it a more complex story.

Most blocks auctioned out under the New Exploration Licensing Policy (NELP) are yet to start production. The major production booster came from Reliance Industries Ltd's KG-D6 block in 2009 but has witnessed a sharp declines in gas volumes over the last two years. Even the minor increase in oil production is due to the higher output from the Barmer fields, a pre-Nelp block, in Rajasthan. In the last two years, the country's natural gas production has also dropped at nine per cent on an year-on-year basis. The average natural gas production in 2011-12 was about 130 million standard cubic metre per day (mscmd) and was estimated at 117.8 mscmd for 2012-13.

"We are going to become more dependent on imports. Even if there needs to be a slight incre-ase in production, the government has to incentivise exploration activities. Moreover, the ownership issues and other disputes need to be sorted out swiftly," says R S Sharma, former chairman of Oil and Natural Gas Corp Ltd (ONGC).

While the environment, defence and petroleum ministries are working on faster clearances for blocks, another battle is on between the finance, fertiliser and oil ministries - over pricing. Suggestions made by the Rangarajan committee on pricing gas are facing heat from various corners.

According to the Rangarajan formula, the base price of domestic natural gas would go up to $8.8 a million British thermal unit from the $4.2 currently applicable for gas produced from the KG-D6 and a host of other fields.

If the Rangarajan formula is implemented, the power ministry expects an impact of around Rs 43,360 crore annually, while the fertiliser ministry sees Rs 16,992-crore annual subsidy outgo. On the other hand, the finance ministry had even suggested an alternative formula, which also takes into account well-head prices of suppliers in Qatar, Oman, Abu Dhabi and Malaysia.

Even the industry players such as Reliance Industries Ltd, BP Plc, ONGC and Cairn India Ltd had expressed their reservations regarding the Rangarajan formula.

"Additional activity in the E&P (exploration and production) sector would help India achieve energy security and create a supply certainty for the government and consumers alike," says Sashi Mukundan, country-head (India), BP Group Companies, and co-chairman of Confederation of Indian Industry's national committee on hydrocarbons. "An energy policy linked to market-determined prices would spur activity in the Indian E&P sector, bring in investment, along with cutting-edge technologies, and create supplementary employment."

BP is RIL's 30 per cent partner in KG-D6. According to experts, one of the major challenges the natural gas sector faces is the rapid drop in production from KG-D6, off the Andhra coast. The production from the block has declined to 17.3 mscmd, compared with the estimated 80 mscmd. "KG-D6 is a huge disappointment. If pricing is an issue, it should be sorted out by the government immediately. There must be some policy changes and the government should show some political will," believes Bhavesh Chauhan, senior research analyst at Angel Broking.

Adds Sharma, the former ONGC chief: "While companies are seeking higher price, those in power and fertiliser sectors are looking for a lower pricing regime. I do believe gas pricing should move towards market rates soon. Otherwise, it would dissuade further investment from coming to India."

The recent clearances by the Cabinet Committee of Investment (CCI) has offered some hope to the industry. Till now, a total of 31 oil and gas blocks, worth investments of about $13.42 billion, have been cleared by CCI. "While pricing remains an area of concern, through CCI, the government has given fresh life to the industry. To attain energy security, clearances must be done on a faster pace," says T K Ananth Kumar, director (finance), Oil India Ltd.