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Turbocharge upstream oil & gas sector to hasten India's post-Covid recovery

Vandana Hari, founder. Vanda Insights
As India girds to rehabilitate its economy from Covid’s latest onslaught, pushing ahead with some key and long-awaited reforms in the upstream oil and gas sector could accelerate growth and also secure supply for the country’s growing energy needs.

India's oil and natural gas production has been in a worryingly stubborn decline over the past decade. Crude output in the fiscal year ended March 31 fell by 5 per cent annually to around 610,000 barrels per day (b/d), while gas production slipped 8 per cent to roughly 78.5 million standard cubic meters/day. Covid-related constraints were partially responsible, but the pandemic has also delivered a reminder to build up the upstream sector’s resilience against future shocks.  

Oil producers have been calling for halving the hefty 67 per cent in total levies that they end up paying in the form of royalty, cess and profit-sharing with the government. 

The companies could be asked to commit to channeling the tax relief into boosting production from ageing fields, which would yield longer-term dividend for the government coffers.

It’s also time to double down on cutting through red tape for upstream projects. Onerous and multi-layered approval processes at various levels of government waste time and money. Some need to be consolidated and others simplified through self-certification. Executing projects within strict timelines would give oil and gas development the momentum it badly needs.

There’s nothing like Indian oil and gas players themselves exemplifying progress on “ease of doing business” to attract overseas partners with the funds and technical knowhow that could spur production growth.

Meanwhile, gas production in India does not carry oil’s tax burden, but is also disadvantaged vis-à-vis growing LNG imports, which also come at a higher cost.

There is some low-hanging fruit in the shape of reforms that could propel the country towards its ambitious target of becoming a gas-based economy, and some bigger improvements that will pay off in the longer term.

Though the Covid-induced global demand destruction and abundant LNG supply made imports cheaper, one cannot bet on a sustained softness in international prices as recovery picks up steam.

A foreseeable acceleration in India’s gas demand growth makes it imperative for the country to create a conducive regulatory and fiscal environment to not only boost domestic production now, but also put the sector on the path of sustainable expansion in the coming decades.

The country has adopted a roadmap for boosting gas usage and penetration and has begun advancing on several fronts. The strategy includes beefing up gas transmission infrastructure, incentivising industries to switch to the cleaner fuel, and a gradual deregulation of marketing and pricing. 

It is a giant leap of faith to move from decades of highly centralized and government-regulated infrastructure, marketing and pricing regimes in the gas market to a liberalized system built on free enterprise, competition and innovation. The execution will need persistent determination on the part of all stakeholders and strong coordination across the downstream ecosystem.

The launch of the country’s maiden gas exchange to trade imported LNG last year and the introduction of electronic bidding for the sale of domestic gas are enablers of price transparency and a more efficient marketplace. 

But to make the electronic bidding system fair and truly effective, gas buyers and sellers need to have up-to-date information on the total capacity in pipeline systems on their trade routes and the unused capacity available, on a dynamic basis. That is typically not the case at present.

An elegant solution would be to create an independent national nodal agency to collate and disseminate such information on a real-time basis.

There is also a need for standardization in the gas trade and fiscal regimes. A uniform template for all gas sale and purchase contracts will help avoid needless conflicts. Levies and taxes on gas sales should be harmonized across all the states to ensure a level playing field and avoid price distortions across borders. Bringing natural gas under the GST system could help achieve that goal.

Downstream market deregulation needs to be extended to the well-head. It’s time to phase out government allocation and pricing of gas from Oil and Natural Gas Corp. and OIL’s older fields. It’s also time to harmonize taxation and incentives across the various licensing regimes, as they were less generous a few decades ago. This would encourage companies operating the older, depleting fields to plough funds to boost the asset’s life and productivity.

Finally, the growth of domestic gas consumption – and production – depends on the establishment of more pipeline connections. 

Projects to boost capacity on trunk routes and build more spur lines to connect gas fields and potential end-users to the existing grid, especially in remote areas, needs to be fast-tracked. 

The target of doubling national gas pipeline capacity in the next two to three years will need the full support of the central and state governments, from ensuring faster approvals, to facilitating speedy construction.

India has a short window of opportunity to give the domestic upstream sector a shot in the arm, especially with regard to shoring up oil and gas output from producing fields. Aside from making the most of the national resource wealth, it would help moderate the upward incline of imports over the coming years.

Vandana Hari is founder of Vanda Insights. Views are her own.

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

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