The Government, through its actions, has made the oil and gas sector unattractive for prospective investors. It may be a good idea to put future auctions on hold, reassess policies and make them friendlier for investors.
It is delicious irony indeed. The government’s auction of oil and gas exploration blocks has flopped in the same year when it had its best advertisement — the commencement of gas production from a block awarded in a similar auction early this decade in the KG-Basin deepwaters.
Recall that the bidding for the latest, the eighth round of NELP (New Exploration Licensing Policy), closed barely a month after first oil flowed out of India’s largest on-land oil discovery in the last two decades in Rajasthan and the irony is complete.
NELP VIII had 70 blocks on offer but there were only 76 bids for 36 blocks. This is by far the worst performance for any NELP round and is in stark contrast to the last two in 2008 and 2006,
The 2006 round was the most successful one so far, with 165 bids for 52 blocks. The seventh round last year was good too, with 181 bids for 45 blocks; as many as 96 companies bid for the blocks. Indeed, the latest round would have been a washout but for the support of state-run ONGC which, along with its partners, bagged 25 of the 36 blocks that were eventually picked up.
Why this sorry spectacle when the auction should have, given the success stories above, attracted a tremendous response?
Brave face
The Government is putting up a brave face, saying that the response is “encouraging” in the backdrop of the global financial crisis and the response to similar auctions held by other countries in recent months.
Yet, the Director-General of Hydrocarbons, Mr V. K. Sibal, has said that legal issues flowing from the dispute between the Ambani brothers over KG Basin gas and “misinformation among investors” have combined with the economic downturn to put off prospective bidders.
To a certain extent, Mr Sibal’s contention is true. The feud between the Ambani siblings has proved to be bad advertisement, not just for the NELP bids but also for India Inc and for the government’s ability to handle high-profile business disputes.
The controversies that the dispute has set off on gas pricing, marketing and regulation are perfect examples of how to put off prospective investors, especially from abroad.
Which respectable investor would want to throw his money, given the current difficult environment, into a country whose oil and gas sector is beset with legal issues, with the government itself neck-deep in the quagmire?
That said, it needs to be pointed out that it is not so much the fraternal face-off between the Ambani brothers as the issues it brings to the fore that might have turned away prospective foreign bidders. Some of these issues are:
Should the government set the price at which gas from the NELP blocks is sold?
Should the government decide who the customers will be for the gas and how much each should get?
Is there a regulator who is active in setting ground rules and mediating in disputes in a fair manner?
Is there stability in government policy?
The government’s actions in the last couple of years have been anything but encouraging for those seeking a free market for gas in the country.
Throwback to APM
It constituted ministerial groups at the drop of a hat and these groups sat in judgement over pricing of gas from NELP blocks, over allocation of gas to customers, and so on. Simply put, it was a throwback to the control era. While some of the government’s actions were in reaction to the dispute between the Ambanis, the fact is that it should not have acted the way it did, sending out all the wrong signals to prospective investors watching from the sidelines.
Any multinational oil and gas company seeking to invest in the country would look for freedom to set the price for its gas — subject to regulatory purview, of course — freedom to decide who it will sell to and in what quantity, and a clear regulatory environment. Would the government ever dictate the price at which Maruti Suzuki should sell its Swift model and who it should sell to? The fact is that the government, through its actions, has made the oil and gas sector unattractive for prospective investors.
Ideally, the market should have been left to its means with a regulator mandated to keep an eye out for unfair practices. Sadly, the sector regulator, Petroleum and Natural Gas Regulatory Board (PNGRB), has yet to make its presence felt in any serious manner. It has largely confined itself to the city gas distribution business, where its work has left a lot to be desired. The PNGRB’s approval of transportation tariff for Reliance’s cross-country pipeline is now awaited and will be the first real test of the regulator’s fair and unbiased approach.
Unstable policy
The recent controversy over whether gas qualifies for a tax holiday (as oil does) shows how unstable government policy is.
The seventh round of NELP, due in 2007, was delayed till well into 2008 because of issues surrounding tax holidays. The latest Budget clarified the picture but a lot of avoidable confusion had been caused by then.
Investors sinking millions of dollars in the risky exploration business deserve clarity and stability in policy. Tinkering with important elements such as tax breaks is not exactly a good advertisement for a country eagerly seeking foreign capital in its oil and gas sector.
Give NELP a break
Given the experience with the last two rounds (NELP VII was delayed by a year), the government should probably review its policy and put future auctions on hold temporarily. It may be a good idea to focus on execution of work on the blocks already awarded and get them into production.
Multinational oil companies are anyway not going to return to investment mode till the global downturn fully reverses and oil prices climb back to higher levels. When they do, they are bound to first look at other promising acreages that are opening up before they come to India.
Large corporations such as Shell, ExxonMobil and Chevron have anyway not actively participated in NELP rounds in the past and it is unlikely they will look at India seriously in future.
The domestic players are already sitting on a large number of blocks where they have to invest in exploration; their appetite for newer blocks may, therefore, be limited. Their tight finances, thanks to the government’s pricing policy, could also prevent them from bidding for new blocks.
As it takes a breather on NELP, the government should reassess its policies for the gas sector and make them friendlier for investors. It should act in unbiased fashion and frame policies that remain stable over the long term.
Meanwhile, the impression that the oil sector is fast falling into the hands of oligarchs, much like in Russia, is gaining ground, especially among international observers. How the government handles the Ambani dispute could well decide whether this impression will strengthen or vanish.
Hindu Business Line
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