A fair year for upstream oil & gas sector

A fair year for upstream oil & gas sector

An anniversary is a good landmark to look at the proverbial glass, to see if its half-full or half-empty. The media, late last month, provided a host of options to choose from. From claims of the Modi government “having achieved in one year, what could not be achieved in last 30” to sober notes warning of the “fall of industry perception back to where it was before the new government took over”, we have a hugely diverse spectrum to rate the performance of the present government at the Centre.

For oil & gas upstream, it will be a good idea to look at the specifics of last 12 months, and why they evoked a positive or passive or negative response.

The upstream oil & gas industry went through a catharsis during 2011-2012, with all activity at the nadir and a complete loss of stakeholder-trust. At the time of the release of the Rangarajan Committee report, the directorate-general of hydrocarbons identified more than 20 issues as the root cause of delays and conflicts. Then, during 2013-14 certain initiatives by the team in saddle saw a strong and open interaction between the stakeholders on some of these points. This resulted in better understanding of the problems and joint initiatives for expediting the production-sharing contract processes and decisions. Thus, solutions could be found to nearly half the issues identified earlier. The industry felt upbeat at this point. However, before these could be implemented, came election-time. The first five months of 2014, prior to elections, was a time of great uncertainty for officialdom. An emerging regime with unknown policy contours created its own concerns resulting in a policy of “holding on” so that “either a decision was not taken or if already taken then not implemented”. Waiting for the blessing of the new regime became the first priority. This was the status when the current regime began.

The first year of the new regime has seen the resolved and pending recommendations being taken to the CCEA and getting approval. These have been implemented expeditiously and efficiently. Also, the improvements made in MC operations are being continued with full vigour. The implementation of domestic natural gas pricing formula, notified earlier, was also one which action had been stalled in the run-up to the elections. The Rangarajan formula was overturned in favour of a new formula, where the CoS unreservedly recommended “the lowest cost to government” as a basis of selection rather than any contractual commitment or economic rationale. It was accepted, decided and implemented expeditiously.

Other outstanding issues inherited from 2013, like ring-fencing, license/ contract extension, fiscal regime of contracts, unified licensing policy, exploration in ML areas, shale and tight hydrocarbon exploration for PSC blocks, remain works-in-process thus far. A long time back, during a more interactive era, industry had made some recommendations on most of these issues. As of now, it is not known whether these are likely to be accepted or rejected, or if any issues require further elaboration or clarification.

What then is the balance-sheet? On the credit side, the earlier recommendations have been decided upon and there has been superb and speedy implementation of these decisions; gas pricing, on an objective basis through a formula, and the continued improvements in MC process, too are welcome. On the debit side, too much time was taken to confirm outstanding resolved issues, the remaining pending issues are yet to be resolved, the gas pricing formula is likely to be unattractive both for current hibernating reserves as well as new investments, and there is perception in the industry of violation of contract sanctity. Besides, no specific action has been taken to increase activity levels and expedite exploration and there are no moves to improve stakeholder participation and brainstorming.

On balance, the industry would rate the year a positive one. It is not a match-winning performance, but the needle is pointing higher than it was at the start. With a challenging call of 10% reduction in imports by 2022, we need to quickly resolve the pending issues in a manner consistent with the objective.

Going forward, we also need to make sure that the systems are robust and adequate. A robust system delivers consistent results, irrespective of the players involved or the stresses encountered. The current contract administration is subject to multiple pulls in different directions. Without partitioning the responsibilities, and setting of unambiguous objectives, it is unlikely that the system will deliver at stress points. It is also susceptible to quick degeneration with any change of team or less rigid monitoring.

Adequacy can be determined if the decision matrix is unambiguous. This shall require the decision ratio of “expediting exploration and enhancing participation” to be cast in stone with the policies and decision making driven by it. Going ahead, turf interests will have to yield to independent checks and counter balances through an independent regulator. All stakeholders will have to be on the same team with free and open discussions and search for solution. The road is challenging and long while the opportunity is fleeting.


Share Button