Investments in Oil & Gas sector to fetch Energy Security for India

How soon can we see major investment in the domestic, upstream oil and gas sector? Remember, this is in line with Prime Minister Narendra Modi’s “Make in India” initiative, to give domestic manufacturing a major push

Industry analysts predict a major chunk of investment in the domestic oil and gas sector in the next 5 years. In line with Prime Minister Narendra Modi’s ‘Make in India’ initiative.

The initiative will give domestic manufacturing a major push, and all sectors – upstream (oil and gas exploration), midstream (gas pipeline and ship transport) and downstream (refining) – are likely to benefit.

Recently, the Boston Consulting Group came out with a report where it mentioned that the upstream oil and gas sector will see in excess of 1.5 lakh crore investment over the next 5 years, for discovery & exploration of basins across the country – onshore and offshore.

For a complete energy security, India needs a robust grid of natural gas pipeline infrastructure. This infrastructure will ensure an equitable distribution of gas & the sector will see investments in excess of 2.5 lakh crores. Refinery & petrochemicals, too, are likely to see huge investments of about Rs 88,000 cr and Rs 100,000 crore, respectively.

Moreover, to jump-start manufacturing industry, the government will emphasis on local value addition, opening of more service centres in India and providing access to capital at globally competitive rates.

Energy-Security

India presently imports more than 80% of its oil needs, and it doesn’t have adequate storage facility to store oil. Developed countries are constantly increasing their capacity to store oil domestically, to ensure uninterrupted supply in times of distress. China has enough storage to last more than 90 days, and they’re building reserves to store 180 days’ worth of supply. Given the unpredictable political situation in Asia, the Government of India must expedite the process of building storage facilities. In fact, consumer markets have made the most of crashing global crude prices by investing in large-scale storage facilities – both strategic and financial.

Low energy prices are a boon because India is—and will, in the near future, remain—a net energy importer. However, if energy prices start to inch up, as they inevitably do, it’s domestic exploration and production that will give India an edge against higher oil prices.

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Fast Tracking Oil & Gas in India

Like many other sectors, Domestic Oil and Gas exploration industry has been mired in bureaucratic hurdles since long. Although NELP has helped the industry make some headway, a lot is yet to be done to enable India harness the true potential of its Domestic Oil and Gas production.

And the new revenue sharing formula being proposed by the government according to which state gets a share from the first day of production, irrespective of cost incurred on the field  goes against the grain of its commitment to ease the business environment in the country.

Previously the oil ministry was in favor of knocking out the prevailing contractual regime wherein oilfield operators recover their costs before sharing profit with the government, as it became controversial due to its strict audit notes and requirement of state to monitor the contractor’s expenditure to protect the government’s share of profit.

However, having done a detailed discussions with global and domestic investors, the oil ministry has now decided to revise the system, which attracts explorers only for explored basins. It is in favour of non-controversial revenue sharing model for basins where oil and gas is established, like say blocks in Assam, Cambay and the Krishna Godavari basin. In September 2011, while examining product sharing contracts. (PSCs) of Reliance Industries, BG and Cairn India, the Comptroller & Auditor General ( CAG) of India had criticised that the contractual regime provided “inadequate incentives” for private contractors to reduce capital expenditure. Prime Minister Manmohan Singh constituted a committee under his Economic Advisory Council Chairman C Rangarajan, which recommended to scrap the PSC model and adopt a non-controversial revenue sharing model where cost-recovery was not allowed. “The government will not launch the tenth auction round unprepared and in a hurry just because the auction is pending for over four years. Objective is to attract global energy firms and not to score number by auctioning blocks to overburdened domestic companies,” a top government source said. The Narendra Modi government is upset over the dismal performance of state-run explorers such as ONGC and Oil India and wants them to expeditiously carry exploration blocks in existing blocks rather than adding more blocks to their portfolio. More than three-fourth of 254 blocks auctioned under Nelp are with public sector companies, particularly ONGC and Oil India.

Exploration success is eluding India since 2002-04, when RIL discovered gas fields in its KG-D6 block and Cairn found massive on-land oilfield in Rajasthan. “These discoveries were made by two private companies after almost four decades of ONGC’s discovery of the Mumbai High. ONGC is under the government’s radar to perform and we are expecting results soon,” an oil ministry official said.

Oil and Gas sector can make significant contribution in achieving the goals outlined by Modi govt. Therefore it is extremely important that an efficient solution is found soon attract the much wanted investment in the sector. It will be a win-win situation of the industry, for the govt. and most important, for the people of the country.