Pricing freedom key to raising India's oil output

Much of the sweet crude produced by companies in India is currently sold at a discount, which impacts company revenues and the government's earnings

Easy access to energy at optimum cost is crucial for broad-based socio-economic development in any country. Dependence on imported oil has been a marked feature of the Indian economy. Digboi in Assam was the first commercially successful oilfield to be discovered anywhere in the world. It is still in operation. 

Despite India’s early lead in production, an estimated 52 per cent of India’s sedimentary basins are yet to be explored. Only seven of the many such known basins are currently in production. These anecdotes along with the recent geophysical surveys indicate that India has a fairly large hydrocarbon reserve that is waiting to be explored. 

Raising India’s domestic crude oil production is a priority area of the present government. Billions of dollars of investment and the latest technologies are required to access the country’s hydrocarbon basins to maximise its resource potential. The government has been swift in recognising that the lack of seismic sedimentary basin data has negatively impacted the upstream sector. 

These policies have culminated in a slew of industry-friendly reforms. Bidding for discovered small fields, the policy framework for early monetisation of coal bed methane (CBM), the Hydrocarbon Exploration and Licensing Policy (HELP) and Open Acreage Licensing (OAL) represent a fundamental shift. 

While these policies enhance ease of doing business, they have a far-reaching impact on establishing a free market for crude oil in the country. Marketing and pricing freedom will eventually result in far-reaching economic benefits to the industry, the government and the nation, thus heralding a new beginning in India's oil policy.

History has proven that free trade and pricing is largely responsible for creating jobs, lifting hundreds of millions of people out of poverty and enhancing prosperity. 

Most metals and minerals in India are freely traded, barring a few highly strategic ones. Crude oil however is an exception. Current restrictions on crude oil limits the marketing flexibility and negotiation ability for crude oil producers and thus does not give them adequate returns on their investment. This unintentionally benefits the downstream industry, as prices are artificially suppressed. 

It is also important to recognise that, in addition to selling in the domestic market, Indian refineries also export significant quantities of petroleum products. Refineries sell their products in international markets and get the international price.

Similarly, crude oil explorers should also be permitted to discover and get international market prices instead of a discounted price. This is the encouragement required by big global firms for making investments in India’s oil sector. Interestingly, Indian refineries have started importing crude oil from the US, thus establishing the economic rationale of free trade.

Countries such as the UK, China, Indonesia, Malaysia and Thailand, do both — import and export crude oil. Similarly, Canada is a premier foreign supplier of crude to the US as well as the biggest customer for its exports. In these countries, crude oil is sold in higher-valued markets. This results in fair prices, which in turn stimulates more drilling and production. This free trade in crude oil has helped optimise costs and increase domestic production.

Free trade will help establish a fair price for Indian crude. Producers of crude oil will receive prices which are commensurate with global prices of crude oil instead of a discounted price. The government stands to benefit from incremental value creation as a significant part of the project value accrues to the state. Free trade will unlock more economic benefits and remove disincentives to production.

Much of the sweet crude produced by companies is currently sold at a discount, which not only impacts a company’s revenues but also the government’s earnings. This tends to discourage domestic production and investment in the sector. 

Lack of international pricing also prevents MNCs from committing investments. An internationally established price of crude will encourage more players to invest in India, leading to enhanced domestic production which can be made available to domestic refineries, which will prefer to buy domestically available crude at a fair price, thus saving on transportation costs. Enhanced domestic production will also aid India’s energy security. These are in line with the government’s vision of an energy secure nation.

To kickstart a holistic investment climate in the sector, the government should adopt free trade for crude oil and international discovery of a fair price. This step will be in line with its reform drive and will also align crude oil trade policy with other resources sector.

India is on the cusp of a transition — from a lower middle income country to a middle income country, from an agrarian economy to an industrially developed country. India’s current per capita energy consumption is one-third the global average. With growing affluence, energy consumption will rise.  

A structured approach to economic monetisation of natural resources will hugely boost socio-economic development and will contribute to employment generation. All these will directly assist in poverty alleviation. 

A vibrant E&P sector with substantial participation by the industry will expeditiously open up the country’s unexplored basins and increase domestic production. This will help us move a step closer to government’s vision of reducing crude oil imports by 10 per cent by 2021-22.   

The writer is Group Chairman, Vedanta