HELP is not enough

 

“HELP is on its way!” quipped a senior official in India’s oil ministry a day before the union cabinet approved the new hydrocarbon policy. Oil minister Dharmendra Pradhan, while announcing the Hydrocarbon Exploration Licencing Policy, emphasised on its acronym HELP, hinting how his government believes that this is the panacea for India’s upstream hydrocarbon sector.

Oil pump at sunset
Oil pump at sunset (Courtesy: http://www.investmentu.com/)

A following press note highlighted that HELP “provides for marketing freedom for crude oil and natural gas.” Effectively, the benefits of the policy would be applicable to new discoveries. This policy also formalised the mechanism for awarding oil and gas discoveries based on the quantum of revenue companies are willing to share with the government.

An upstream oil industry official upon condition of anonymity questioned the government’s claim to allow marketing and pricing freedom under HELP. “The returns from this policy will hopefully yield results after another 3-5 years. The previously prevalent New Exploration Licensing Policy (NELP) had offered ‘freedom to the contractors for marketing of crude oil and gas in the domestic market’ back in February 1999. Today, a formula governs price determination. Without policy consistency, we cannot expect investments in upstream hydrocarbon resources in India,” he fumed while waiving a copy of NELP.

HELP has singed existing operators of hydrocarbon blocks in the country. The gazette notification explains that current benchmarks for price of domestic natural gas and crude oil will be for “the sake of calculation of government revenue.” It further states that the “Government’s take will be calculated based on the actual price realised” for both crude oil and natural gas. This indicates that products from the new discoveries will sell at a higher price than the current benchmarks.

ONGC Chairman and Managing Director, D K Sarraf (Courtesy: Ministry of Petroleum and Natural Gas)
ONGC Chairman and Managing Director, D K Sarraf (Courtesy: Ministry of Petroleum and Natural Gas)

Oil and Natural Gas Corporation (ONGC), contributor to 72% of India’s crude oil and 48% of natural gas production has asked the government to liberalise marketing policies for the company’s existing assets. ONGC Chairman, D K Sarraf had said, “When the domestic gas price formula was institutionalised, we didn’t expected the price to come down to such levels. We have now requested the government to put a floor on the price at $4.2 per million British Thermal Units (mmbtu).” A subsequent price revision brought down the price of domestic gas from $3.82/mmbtu to $3.06/mmbtu, translating to lower revenues of Rs 3,040 crore for ONGC.

The biggest question mark on HELP is regarding the viability of Revenue Sharing Contracts (RSC). Industry players, through leaked representations, have expressed distress on this model of contract. One such letter read, “RSC magnify the risks for explorers as companies will have to ensure fixed returns to the government, even if exploration costs rise exponentially.” The Production Sharing Contract regime under NELP had allowed companies to offer lower returns to the government if investment rose.

Oil minister Dharmendra Pradhan needs to realise that he will need more than just HELP to monetise the country’s upstream assets. The industry needs assurance of a reliable policy regime before roadshows for the first round of oil and gas block auction commence.

Advertisements

2 thoughts on “HELP is not enough

We appreciate your feedback. Please mention an identity in case you wish to discuss or differ from the aforementioned opinions.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s