Oil sector contracts to have 10% domestic purchase clause

Scheme to promote local manufacturing under Make in India drive

To promote local manufacturing under the Make in India drive, the government on Wednesday announced a 10 per cent purchase preference for local content in all petroleum sector contracts. The tweak in the existing tender guidelines would aid increasing the share of domestically manufactured components in projects awarded by firms such as Oil and Natural Gas Corporation (ONGC) and GAIL.

Under the new scheme, separate thresholds for local content would be pre-defined across the range of equipment and services and the lowest bidders would have to match that requirement for a particular tender. If the lowest bidder fails to commit to the mandatory local content share, the second-lowest bidder willing to match the local content requirement would be awarded the contract provided his quoted price falls within the 10 per cent price range of the lowest bidder.

“Our ministry has estimated oil companies’ annual capital expenditure of around Rs 90,000 crore. The award of these contracts should increase local manufacturing. Based on discussions within an internal steering committee on the matter, companies and other stakeholders, we have decided there should be 10 per cent purchase preference in tenders,” Oil Minister Dharmendra Pradhan said while briefing media on the new policy measure.

Pradhan added the move - aimed at boosting the local industry without compromising on the international competitiveness of tenders - would not require a separate approval from the Union Cabinet. He said the oil ministry would soon upload a concept paper on the proposal on the ministry’s website calling for stakeholder consultation. “These consultations are expected to be over by February 19. Rolling out the new proposal would go into the next financial year.”

The policy does not differentiate between domestic and foreign companies as long as they meet the minimum cut-off of locally manufactured content in a tender. The ministry has already started the process of seeking information from oil public sector undertakings on the kind of contracts that can attract local content.

Under the new policy, contracts for most streams of equipment and services — including drilling pipes, rigs and oilfield services — can attract mandatory local content share of 10-50 per cent. “Based on our estimate, up to 20 per cent local content can come in service and supply related contracts, while 30 per cent locally manufactured content can come in engineering, procurement and construction (EPC) contracts,” said Pradhan.

Experts gave a thumbs-up to the new initiative arguing it might be a good way to develop the local industry. “In the current low oil price scenario, the price of oilfield services contracts has already fallen 30-40 per cent. Therefore, the new policy will not discourage foreign firms, even if they have to set up manufacturing facilities locally, as they try to bag the limited number of contracts being floated in the market,” said a senior analyst from an accounting and consultancy firm.

The oil ministry had in October 2014 withdrawn an earlier policy that made 10 per cent price preference available to domestic companies against their foreign counterparts. That policy was applicable to tenders seeking services and equipment for oil sector contracts, but did not cover raw material purchases.