Kelkar panel report on oil sector reforms: 'Link gas price to market'

Ahead of Union Budget 2015-16, the petroleum ministry has made public a key report on oil sector reforms by a panel under former Finance Secretary Vijay Kelkar.

If implemented, these could bring down the country's annual $150-billion oil import bill by at least $40 billion.

Among the 51 recommendations are implementing market-linked pricing of natural gas after the end of the current Plan period (March 2017), contract extension up to the economic life of the blocks, revamping bidding parameters under the New Exploration Licensing Policy and allowing the private sector to develop shale reserves in nominated blocks.

"The fair price for gas can only be the best price a gas molecule commands or the price that is market-determined in a transparent way, on an arm's length basis. As the present generation is borrowing this finite resource from grandchildren, equity requires the future generation be fairly compensated," the panel has said in a 111-page report, 'Road map for reduction in import dependency in the hydrocarbon sector by 2030'.

As part of its suggestions on institutional reforms necessary to transform the sector, Kelkar has pitched for creating an empowered Cabinet Committee on Energy (CCE) for policy formulation and integration of energy related issues, making DGH an independent regulator for the upstream oil and gas sector rather than a mere advisor to the government besides empowerment of DGH along the lines of Sebi.

It has also called for creating an independent cadre of staff for the downstream regulator Petroleum and Natural Gas Regulatory Board (PNGRB) and undertaking fiscal reforms including covering oil and gas under the proposed Goods and Services Tax (GST) framework in order to facilitate development of markets by simplifying and standardizing taxation norms and ensuring similar prices of oil and natural gas across the country.

The panel's also recommended extending the definition of 'Mineral oil' as used in Oilfield Regulation and Development (ORD) Act of 1948 to the Income Tax Act of 1961 and waiving customs duty on import of LNG for all purposes.

The panel was formed by the previous government in 2013. Its final report, in September 2014, follows an initial report of January 2014 and a consultation paper inviting suggestions from stakeholders in August last year.

The petroleum ministry has already raised natural gas prices by 33 per cent to $5.61 a unit, based on an average of global wellhead prices.

According to Kelkar, a competitive market-linked price for natural gas will incentivise higher exploration and production, and make marginal and stranded fields viable. New discoveries of gas in India are likely to be in deep water and ultra deep water basins, implying riskier exploration expenditures. "As gas prices rise to market levels, increased production will lead to direct savings in the import bill, current account deficit and improvement of fiscal health," the committee said.

KEY RECOMMENDATIONS

• Contract extension up to the economic life of blocks
• Revamp bidding parameters under Nelp
• Allow private sector to develop shale reserves in nominated blocks
• Continue with the production sharing contract regime as opposed to the Rangarajan-proposed revenue sharing contract model
• Make Rs 7,000 crore available to DGH for creation of a national databank on basins
• Delegate quasi-judicial power to DGH on the lines of Sebi
• Exempt upstream firms’ production from mature fields from subsidy sharing
• Offer equity participation to foreign firms in nomination fields
• Ensure absence of retrospective changes to contracts
• Encourage coal gasification & shale gas exploration
• Develop petroleum clusters of oilfield service providers on the east and west coasts

Disagreement
The panel is also in favour of continuing with the existing production sharing contract (PSC) regime in the hydrocarbon sector, as opposed to the Rangarajan-proposed revenue sharing contract (RSC) model for future contracts. And, for making Rs 7,000 crore available to the Director General of Hydrocarbons (DGH) for creation of a national databank on domestic basins, and delegating quasi-judicial power to this entity, on the lines of the capital markets regulator.

"The committee has reservations against accepting the biddable RSC model due to the inherently misaligned risk-return structure, which leads either to lower levels of production due to resultant reduced exploration efforts and lower recovery ratios or to high windfall gains to operators, encouraging contract instability due to political economy factors," the 10-member panel that held 30 meetings over 18 months has said.

Under the PSC regime, oil companies can recover costs from sales of oil and gas before sharing profit with the government. The Comptroller and Auditor General of India had criticised this approach, arguing it encouraged companies to needlessly increase their capital expenditure. Under the RSC model, companies state upfront the amount of oil or gas they will share with the government from the first day of production.

The committee has also spoken in favour of a long-pending demand of the upstream oil firms - exempting their production from mature fields from subsidy sharing, apart from introducing an Open Acreage Licensing Policy by 2016; offering equity participation to foreign firms in nomination fields; ensuring absence of retrospective changes on contracts, to boost investor sentiment; encouraging coal gasification and shale gas exploration; and developing petroleum clusters of oilfield service providers on the east and west coast.

Another recommendation that would impact business sentiment is extension of the contract tenure up to the end of the economic life of the asset. "This would create incentives for operators to focus on long-term investments such as enhanced oil recovery techniques, rather than short-term gains," the panel has said. The suggestion assumes significance as Cairn India, petroleum arm of Vedanta Resources, is seeking extension of its contract for the Rajasthan oilfields beyond the current term ending 2019.

The Kelkar panel has also noted that shale gas might account for at least 75 per cent of India's untapped hydrocarbons. "India should put in place a policy to allow private players to explore shale from nominated blocks," Kelkar has said. The current policy allows only state sector units to explore shale reserves in onland blocks allotted on a nomination basis.