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India's current account deficit has hit alarming proportions: it has risen from $78.2 billion in 2011-12 to $88 billion in 2012-13. Finance Minister P Chidambaram wants to hold it within the target of $70 billion for the year. A big contributor to the deficit is the oil and gas sector - India imports almost 70 per cent of its crude oil requirements. The fall in the rupee vis-à-vis the dollar and the rise in international crude oil prices, thanks to disturbances in Syria and production shortfall in Libya, threaten to worsen the situation. One option for Petroleum & Natural Gas Minister M Veerappa Moily is to import from Iran in rupees. But that has its own complications; the United States is unlikely to take it well. Another option, of a "fuel curfew", has been discarded. The real answer is to up domestic production of crude oil and gas.
This is where things turn really murky. Senior executives of state-owned Oil and Natural Gas Corporation (ONGC) are tired of running from pillar to post, they say, seeking clearances from various government authorities for some blocks the company wants to sell stakes in. ONGC, which has been in talks with ConocoPhillips and Shell Corporation for over a year to farm out stake in its deep water and ultra-deep water blocks, has found itself up against the defence ministry's stringent norms on exploration in the "no-go" areas. "You cannot tell me to dig 100 metres north and 100 metres south because it is a no-go zone. That is not how exploration happens. If a block is in a no-go zone, it should not be offered to explorers in the first place. We are made to suffer for what the government should be facilitating," says a senior ONGC official. The indignation is evident.
Worse, ONGC is not alone in its struggle: Essar Oil, Reliance Industries, Gujarat State Petroleum Corporation, Tata Petrodyne, BG Group, Cairn India - all have similar stories to tell. Pending approvals on projects and constant policy flip-flops are not only delaying exploration but are also keeping investors at bay. This, despite the well-acknowledged fact that India's exploration and production sector needs experienced international players and big investments. "The country needs more oil and gas if it has to grow. Increasing imports are pushing the economy down a fiscal cliff. Today, capital flows freely in the global market. Why should any company invest in India when it can make more money by investing in another country and then sell LNG at more than $14 per mBtu (million British thermal units) to the Indian buyers?" said PMS Prasad, executive director, Reliance Industries, in a letter to the Parliamentary Standing Committee on finance.
Low rates
Prasad's ire comes from the low price at which Reliance Industries has to currently sell gas: $4.2 per mBtu. This June, despite opposition, including from within the Cabinet, the government approved a new pricing formula which will come into effect from April 2014, which could lead to prices doubling to $8.4 per mBtu. Reliance Industries, which produces natural gas and oil from its D1, D3 and MA fields in the D6 block of the Krishna-Godavari basin, has been seeking market price (decided by buyers and sellers) for natural gas. Justifying a higher price, Moily, last month said around 3 trillion cubic feet (tcf) of discovered natural gas in the country is lying unutilised as it's not viable to commercially exploit the reserves at the prevailing price ($4.2 per mBtu). Reliance Industries says the cost-plus regime for gas pricing was not only against the contractual commitment of the government under the production-sharing contract, but also of little economic and commercial relevance. This was because the exploration and production sector has a low probability of success and faces geological risks. "India's oil and gas production has remained stagnant due to low investor interest, difficulties encountered in monetising assets and bringing them rapidly into production. Under such a scenario, the most acceptable solution is to target increase in domestic oil and gas production," Prasad added in his letter.
The company adds that with the government going back on its word in the last couple of years, and with talks of price control and regulatory hurdles, India is marching back to the pre-1991 era. So much so that constant policy changes have led to Reliance Industries weigh its options on future exploration and production bids in India. "Unless it is demonstrated that irrespective of any government, the continuation of economic and sector policies would be respected, no investor will have confidence. We are not very sure we would participate in future exploration and production bid rounds," says Bibhash Ganguly, president and chief operating officer (business operations, petroleum, exploration and production), Reliance Industries. Of the $20 billion that has been invested in oil and gas fields in India under New Exploration and Licensing Policy in the last five years, over 60 per cent has come from Reliance-Industries-led consortia. "Above all, the sanctity of contracts must be maintained; otherwise, investments vital for the country's energy security will be adversely affected," said Prasad.
Exploration and production companies in the country say that had it not been for the government's indecisiveness, India could have saved billions of dollars in oil import. Consider this: out of the 110 discoveries announced in the last ten years, only six are under production. Oil production at Essar Oil's Ratna-R Series block is held up as the company is awaiting approval for over a decade. The block is located off the Mumbai shore. Tata Petrodyne's block in the Palar basin, PR-OSN-2004/1, on the east coast, is under force majeure due to restrictions imposed on petroleum operations by the department of space. "We are very disappointed about the Palar block. We are holding it for last two years and there is no progress yet," says Anupam Mathur, executive director & CEO, Tata Petrodyne. Cairn India is the operator of the block with a 35 per cent participating interest. ONGC also holds a 35 per cent participating interest. The consortium has so far invested around $40 million in the block.
The energy import bill constitutes nearly 37 per cent of total import, and energy demand is likely to remain high in the future. India is the world's fourth largest oil importer after the US, China and Japan. Officials from the ministry of petroleum and natural gas agree progress has been tardy. "Since 2006, there were very few clearances or major decisions that had happened in the petroleum ministry. Apart from the Cairn India deal (its acquisition by the Vedanta group), Reliance Industries-BP tie-up and a few block clearances, nothing major happened. It was only in the last nine months that files started being cleared. Besides, we have expedited decisions on management committee meetings," says a senior ministry of petroleum and natural gas official.
Till last month, over 90 management committee resolutions were awaiting the oil ministry's approval. Each block has a management committee which is an oversight panel, chaired by the director general of hydrocarbons. Oil ministry's joint secretary (exploration) assumes the vice-chairman's post, while operating companies are members on the management committee. Decisions taken by the committee are to be approved and signed by all members. Oil ministry sources say in many cases, the oversight panel had taken decisions but not signed and approved them for around three years. There were over 250 files that had been pending for months.
"The situation, however, is different now. We have been asked to clear the pending files," another official from the ministry adds. Moily, at a recent event in Mumbai, said that when he assumed charge in October 2012, over 250 files were pending and not signed for five years. The minister, who admitted that bureaucratic delays needed to be removed in India, acknowledged that regular changes in policy matters were hurting investor sentiment. "We have only two or three major international investors in India and even they are being hunted, as if they were devils," Moily had said. "If this continues, they will leave and go to places like Vietnam and Brazil." But Moily's ministry can do much more by expediting clearances for Indian explorers. Says Michael Maloney, chief operating officer of Perth-based Oilex: "From the point of view of an overseas investor, things are bleak. The government should lessen the regulatory burden on investors who are putting in money." Oilex, in the last two years, has submitted five drilling plans, out of which only one has been cleared.
(Shine Jacob in New Delhi contributed to this report)
