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Towards Boosting Domestic Crude Production

In line with a series of liberalisation policies for the upstream sector in recent years, the government, with its latest move of deregulating domestically produced crude oil, aims to give impetus to exploration and production activities in the country and increase the overall hydrocarbon output

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It was in September 2014 when the Kelkar Committee Report noted that India’s rising import dependence puts significant pressure on its current account deficit and exposes the country to the risk of an energy crisis.

“The recent political turmoil in some oil-producing economies and its subsequent after-effects on the Indian economy is evidence of the growing dependence on global energy supplies and highlights the need for reforms in India’s oil and gas sector,” it added.

Eight years later, the prevailing geopolitical situation, more than ever, still reflects the observations made by the committee. The committee recommended that the government accelerate appraisal of India’s sedimentary basins and maximise Exploration and Production (E&P) activity in the country. 

It also suggested that the extraction and exploitation of non-renewable energy sources, including their pricing, should be based on a long-term sustainable strategy that considers intergenerational equity.

With massive liberalisation efforts for the oil and gas sector in recent years through policies like HELP, OALP and DSF, the Cabinet Committee on Economic Affairs (CCEA) chaired by Prime Minister Narendra Modi on 29 June took another landmark decision for the sector and deregulated domestically produced crude oil.

The decision implies that all E&P companies will now be free to sell crude oil from their fields in the domestic market from 1 October 2022. Exports, however, shall continue to be prohibited.

In the current arrangement, the government fixes the quantity each buyer will pick, limiting the scope for price negotiations and often selling it to oil marketing companies at a discount. The government fixed this quantity for oil produced from older oil fields such as ONGC’s Mumbai High and Vedanta’s Ravva. Oilfields awarded since 1999, though, gave producers the freedom to sell oil.

Anil Agarwal, Chairman, Vedanta Group welcomed the decision and said, “This will help increase revenue for the Government. India has vast reserves of hydrocarbons and can produce oil and gas at the lowest cost. Rationalisation of taxes & levies and longer lease of mines, in line with global standards, along with self-certification will help boost India's domestic production. At Vedanta Cairn Oil & Gas, we are committed to make USD 4 billion investment and contribute to 50 per cent of India’s domestic hydrocarbon output.”

Sellers will now be able to e-auction the crude to anyone paying the highest price. For ONGC’s Mumbai High Field, it can auction its 13-14 million tonnes of annual crude oil production to any refiner, including private players like Reliance Industries and Rosneft-backed Nayara Energy. Similarly, Vedanta’s Rava Field’s yield will no longer be limited to HPCL.

The Significance

The government says that the decision builds upon the series of targeted transformative reforms rolled out since 2014 and will help spur economic activity and incentivise investments in the upstream oil and gas sector.

However, even after reforms, India’s domestic crude oil production has been declining since FY15 and dropped to just 28.4 million tonnes in FY22. Our June 18 issue highlighted how India needs another Bombay High moment.

India’s oil import dependency has risen over the years, and it is the world’s third-largest oil consumer. Through the move, the government expects domestic crude production to get the much-needed boost to reduce India’s widening trade deficit and ease the pressure on the domestic currency. 

“This is an important decision that will further encourage oil and gas exploration, production and marketing in the country. This deregulation will attract more foreign players, encourage competition and also help producers gain a higher price realization and better return on investments. This decision will play a key role in India’s journey towards energy aatmanirbharta,” said Prachur Sah, Deputy CEO, Cairn Oil & Gas.

Downstream Needs Attention Too

While the upstream players will get competitive rates in e-auctions, often above the international benchmark, private fuel retailers can find it challenging to do business. 

In the last week of May, Reliance-BP had already told the government that fuel retailing for the private sector in the country has become unsustainable due to the prolonged price freezing of fuels by public sector firms. Nayara Energy estimated June's loss close to Rs 700 crore.

Fuel marketers have been making a loss on each litre of petrol and diesel they sell as state-run companies have not increased retail prices for three months now despite rising crude prices in international markets. 

However, state-owned Indian Oil, Bharat Petroleum, Hindustan Petroleum and even Reliance have been able to offset some of these losses due to higher gross refining margins and exports.

"Despite the strength seen in refining, overall earnings for oil marketing companies will continue to remain under pressure, given the steady expansion in marketing losses over the last three months," noted ICICI Securities.

The government, however, on 1 July, imposed a Rs 6 per litre tax on petrol and jet fuel exports and Rs 13 per litre on diesel exports. It also announced a cess of Rs 23,250 per tonne on locally produced crude oil as it saw oil companies reaping huge profits due to high international prices of crude oil and finished products.

This windfall tax led to fading away of all the euphoria of 29 June when deregulation of domestically produced crude oil was announced.

Such policy uncertainty in the sector creates a challenging investment environment and deters new private players from entering the fuel retailing business in India. BPCL's disinvestment not going forward had this policy uncertainty at its core.