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Baby steps in price decontrol defined India's oil economy (2013 in retrospect)

By Biswajit Choudhury, New Delhi, Dec 26 : Partial deregulation of diesel prices and the government's nod for doubling natural gas prices from April 2014 were the highlights of India's oil economy in 2013, as the sector seeks a new thrust in the new year for the production of hydrocarbons.


In a fresh round of bidding for hydrocarbon blocks under the New Exploration Licensing Policy (NELP), the 10th thus far slated for Jan 15, 2014, some 86 oil blocks will be up for auction in an effort to attract more investments into the exploration and production sector.

The year began with a major decision that authorised state-run oil marketing companies to hike diesel prices from time to time, translating, in effect, to partial deregulation of the fuel.

Since then, the cumulative hike in diesel prices has been Rs.6.62 per litre in Delhi.

This coincided with both a rise in international prices and a steep fall in the value of the rupee against the US dollar, leading to a spiraling current account deficit to which India's oil and gold imports were the biggest contributors.

The situation improved somewhat toward the end of the year. But the government's target of fiscal deficit of 5.3 percent of the country's gross domestic product (GDP) is a performance that is being closely tracked by markets, foreign funds and ratings agencies.

The partial deregulation in diesel appeared to yield dividends when Indian Oil Corp said in December that demand for the fuel this fiscal had dropped for first time in over a decade, with sales growth falling between 0.8 percent to one percent.

However, oil marketing companies, effective Dec 16, continued to incur combined daily under-recovery, or losses, of Rs.434 crore (around $70 million) on the sale of diesel, kerosene and domestic LPG below cost.

In a bid to boost domestic production of natural gas, the government in June approved the doubling of natural gas prices from the present $4.2 per million British thermal unit to $8.4 mbtu from April 1, 2014, going along with the formula suggested by a panel headed by C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council.

Though the increase is likely to lead to a hike in power and fertilizer costs, the union cabinet, in the interest of exploration, acceded to the demand of leading players like Reliance Industries, bringing liquefied natural gas on a par with global prices.

In January, the Rangarajan Committee had suggested mandating a price of domestically-produced natural gas at an average of international hub prices and cost of imported LNG, instead of the current mechanism of market discovery.

The committee also recommended changes to the government's production sharing contract (PSC) with private explorers, proposing to dispense with the current cost-recovery model in favour of sharing of the overall revenues of the contractor.

It suggested bidding out the blocks based on the highest production share offered instead of allowing operators to first recover all their investment before sharing profits with the government.

"The share will be determined through a competitive bid process for future PSCs," the Rangarajan panel said.

The gas price issue put the focus on production problems of the Reliance-led-consortium-operated KG D6 block in offshore Andhra Pradesh, the output from which has consistently fallen to around 10 million metric standard cubic metres a day since reaching a peak of 60 mmscmd in 2010.

Differences between Reliance and the Directorate General of Hydrocarbons (DGH) led to the petroleum ministry's October order asking the company to surrender over 6,000 sq km area, including five discoveries, in its KG-D6 block because the company did not abide by deadlines.

Such issues between the government and industry are not caused by the absence of a statutory regulator for the upstream sector but are rooted in the lack of clarity on international petroleum industry standards, says the oil ministry's senior-most mandarin.

"We need a compendium of standards of industry best practices, with both industry and regulator joining hands to prepare it. Let the standards be added to the production sharing contracts saying these would supersede the PSCs," Petroleum Secretary Vivek Rae told IANS.

"We need standardization and documentation of industry best practices, and hopefully we'll have them in a few months," he added.

In September, the government allowed state-run oil companies to explore shale gas and oil on acreages given on a nomination basis.

"As soon as the policy was announced, ONGC has started drilling its first wells for shale gas," Sudhir Vasudeva, chairman of the state-run explorer Oil and Natural Gas Corp (ONGC) told IANS.

Vasudeva pointed to this year's overseas acquisitions by his company's foreign arm, ONGC Videsh Ltd (OVL), of stakes in a block in Mozambique and oil blocks in Brazil, Colombia and Myanmar as the highlights for the state-run explorer.

Highlights of 2013:

-Partial deregulation of diesel prices

-Diesel demand this fiscal drops for first time in over a decade

-Government, on advice from Rangarajan panel, doubles gas pricess from April 2014

-Dwindling gas output from Reliance Industries' KG-D6 fields

-Shale gas policy for national oil companies

-ONGC drills first shale well

-Some more overseas hydrocarbon assets acquired

(Biswajit Choudhury can be reached at biswajit.c@ians.in)

--IANS (Posted on 26-12-2013)

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