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Domestic entities have obviously not been able to bridge the ever-widening demand-supply shortfall. The two key reasons for this state of affairs are lack of clear policies and incentives and the absence of a level playing field — something experts believe could change soon.
The real push for the sector came after the New Exploration and Licensing Policy (Nelp) was launched in 1998. Under it, hydrocarbon blocks were allocated based on competitive bidding. To incentivise companies, the government allowed market-linked prices (for crude oil) and introduced a revenue-share policy. (NOT SO FIRED UP)
The move brought in majors like Reliance Industries (RIL), British Gas and Shell Inc. However, only a few of the 302 blocks awarded in nine Nelp auctions have seen major discoveries. Of these, while Cairn’s prolific Rajasthan block is seeing increasing oil production (about 30 per cent of India’s current oil output), Reliance’s KG-D6 basin has witnessed a steady decline in gas output and discoveries by GSPC and ONGC are yet to start production.
Though many of the Nelp blocks are in exploration and development stages, the writing on the wall is clear.
“The government has done a good job by opening the sector to private players, which has brought in technology and investments. However, compared to what was initially expected, the final results haven't been all that inspiring. If you look at the post-Nelp period, we have not seen significant ramp-up in production, as expected. A key disincentive was the highly subsidised regime,” says Sumit Pokharna, deputy vice-president, Kotak Securities. “The subsidies resulted in lower cash generation for upstream PSU oil companies (like ONGC and OIL), which impacted their investment in exploration activities. However, given the diesel deregulation and efforts to reduce subsidy in other regulated fuels, the subsidy burden will come down, leaving more money in the hands of these companies for investment purposes.”
It is not that ONGC and OIL haven’t done anything but perhaps not to the extent of their potential, say experts.
“I wouldn’t like to take away the credit from these companies but would say they could have done better,” says Mehraboon Irani, principal & head, Pvt Client Group Business, Nirmal Bang Securities. “They are among the best in terms of minting cash and growth potential. But the disappointment is the slow pace of exploration, execution as well as decision-making.”
For now, ONGC, which discovered India’s largest hydrocarbon reserves (Mumbai High) in 1974, remains a dominant player in India, both in oil and gas production.
One area where it has done well is its foray into global markets through its subsidiary, ONGC Videsh (OVL). OVL has acquired participating interests in 33 blocks in 16 countries, with cumulative investments at $22 billion. Of these, 13 are producing assets and produced 8.36 mt (million tonnes) of oil and oil equivalent gas in 2013-14 — it contributes to 14.5 per cent and eight per cent of India’s oil and natural gas production, respectively. Had it not been for the subsidies (lower cash generation to that extent) they have been burdened with, the financial position of oil PSUs would have been better.
There have been other hindering factors. Experts say issues relating to royalties, costs, gas and gaps in the existing regulations have hurt sentiment and led to disputes.
“The current issues and litigation highlight there were not enough checks and balances in the policies to avoid possible disputes. However, we now believe the policies being framed now, will take care of such issues,” says Pokharna.
Irani, too, is optimistic and hopes the situation will improve in the next six to nine months.
Within days of coming to power, the government announced a new gas pricing formula and de-regulated pricing of diesel. The latter is a big relief for incumbent public sector oil marketing companies (OMCs) which are under pressure.
While there are gains for OMCs in the form of higher profitability and significant reduction in working capital requirements, it should also help bring back private companies into the fuel retailing business and increase competition. Reliance and the Essar group are already said to be working on plans to revive their fuel retailing operations.
Pokharna says, “The government is also taking steps to curb kerosene consumption by providing PNG (piped natural gas) pipelines. Measures to curb leakage in (LPG) liquefied petroleum gas are also being taken. For instance, Delhi’s kerosene consumption is now zero. With lower consumption and volumes (of regulated products), overall subsidy will also go down.”
While competition for OMCs is set to rise, it is to be seen how they will protect their turf. Irani says it will take time for private players to make a difference in fuel retailing. In fact, competition will help improve efficiency of oil PSUs, he adds.
The companies are aware of the threat and have already started taking steps to improve service quality, expand offerings and introduce loyalty programmes.
Overall, though, an analyst with a domestic brokerage says, “Considering their restraints and the balance-sheet side, the PSUs have done very well and have also expanded their refining capacities. BPCL, especially, has done wonders in term of acquiring global offshore blocks.”
So has GAIL. It has set up a high-margin petrochemicals business, though the pace of expansion was slower than growth in demand. GAIL’s core business of gas transmission and distribution, though, is enviable. Its investments in pipelines should start yielding good results once gas volumes rise.
Going ahead, in all the three segments — upstream, mid-stream and downstream — competition is bound to increase.
Experts say PSU companies are strong with valuable assets and can withstand competition from private players. However, the government and its policies will play a critical role. “The buck still stops at the government’s door. What if oil prices go up, will the de-regulation continue, how will the subsidy sharing work?” asks Irani.
