Business Standard

Editorial: A public sector show

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Business Standard New Delhi

The seventh round of auctions for oil and gas blocks under the New Exploration and Licensing Policy (NELP VII, for short) should be considered a partial success. On the positive side, there are two large international players "" British Petroleum (in partnership with Reliance) and BHP-Billiton (with GVK) "" who bid for the first time, as did seven others. There are other important players like British Gas, who have already opened their exploration account in India, and who bid to expand their footprint, though they were not successful. There were over 100 bids received for the new category of blocks which does not require prior exploration experience, dubbed "S-blocks". And there was the usual aggressive interest shown by the domestic giant, Oil and Natural Gas Corporation (ONGC), which has bagged a third of the 57 blocks on offer. These companies have together committed an investment of about $3 billion, which should be considered reasonable given that the exploration industry is facing its most challenging time with rates for deep water rigs having increased by 40 per cent over the past year, to as high as $250,000 per day, and that too if they are available at all.

 

But that's where the good news ends. This investment commitment has fallen short of the lower end of the $3.5- $8 billion investment band projected by Finance Minister P Chidambaram during his Budget speech in February, when global oil prices averaged $95 per barrel. Oil is within kissing distance of $145 per barrel now. The upside potential of the blocks on offer does not seem to be reflected in the investments committed. This can be attributed in part to the lack of clarity until the last day on the tax holiday available for gas production. The postponement of the auction twice, during which period countries like Libya and Malaysia closed their auctions, may also have had an adverse impact as the global pool of resources available for investment in exploration would have been reduced to that extent.

Another reason for the less than expected investment commitment was that 12 blocks received no bids. There were the so-called recycled blocks or blocks which have had no takers in the past or which have been relinquished by companies. There were some companies, like the Italian ENI, which entered the Indian exploration scene with NELP VI but were not in the picture in NELP VII. And of course, the world's largest oil company, Exxon Mobil, did not bid but stopped at buying the data, as it has done in previous rounds. The state-owned bidders "" ONGC, Oil India, Indian Oil, GSPC "" have bagged the lion's share of the blocks by quoting low for cost recovery and astoundingly high (80-90 per cent) for the profit petroleum that they would share with the government. This has had the effect of squeezing out private sector investment, which is guided by much more robust norms for returns.  Policy makers could choose to be smug, looking at the reasonable investment commitment that has been obtained in a challenging environment, even though it is largely from the PSU block, or they could ask why the likes of Exxon Mobil and Chevron "" which have the exploration expertise that the country needs "" do not bid for oil exploration in the country, and check if any corrective measures are required!

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First Published: Jul 03 2008 | 12:00 AM IST

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