Oil, Gas And Sweet-Heart Deals

New decisions have been announced on the licencing policy for oil and gas exploration and production. A uniform licence for all types of hydrocarbons found during exploitation is welcome. So is an open acreage policy, which gives a chance for an investor to exercise his judgment on its prospectivity. But this will get defeated if its demarcation gets mired in delays for clearances etc., before they are finally notified. It is also presumed that there will be a reverse auction thereafter to arrive at a competitive bid with some concession to the initial proposer.

But in the anxiety to increase ease of doing business, profit sharing has been given up in favour of revenue sharing. No doubt profit sharing involved lot of oversight functions on several investment proposals including best practices in reservoir management, but the problems we encountered were more on account of the poor integrity of the regulators and even of government in several instances along with poor contract management skills of the regulatory functionaries involved.

What is totally overlooked in adopting revenue sharing is the loss of resources in the ground if recovery is not maximised, because there is a conflict of interest between maximising recovery and maximising revenue. Revenue can be maximised at the cost of ultimate recovery. The latter requires several IOR/EOR (Improved Oil Recovery and Enhanced Oil Recovery) techniques which have an adverse impact on revenue. Just like a reasonable rate of return is the bottomline for any investor, whether it is profit sharing or revenue sharing, the bottomline for the government as the owner of the natural resources should be its maximum ultimate recovery.

For in oil and gas exploration/production, good recovery depends on skilful management of the natural reservoir pressure through best practices. Once that pressure is dissipated, the balance of the resources that could be otherwise recovered will be irretrievably lost in the ground for ever. Additionally, lack of total technical oversight could result in permanent damage to the reservoir, by incompetent or unscrupulous producers through flogging etc when good industry practices are not employed.

From all the pronouncements made so far, this aspect seems to have been totally neglected and the country could be staring at huge loss of resources otherwise recoverable. Other economies have addressed this issue with tax breaks for adoption of IOR/EOR technologies to maximise ultimate recovery. This can be redeemed to some extent if some condition is introduced at the time of bidding that revenue sharing should be subject to achieving ultimate recovery.

On gas pricing freedom, it should be remembered that it was the policy from the very start of reforms of this sector from the 1990s. The contracts worked without any problems for two decades until the price fixing regime was brought in. That is history now and one should welcome the market pricing regime. But the way it is formulated as reported in the media and under revenue sharing regime, there could be some areas of concern.

If price and buyer are entirely at the producer's choice, how to prevent sweetheart deals where the producer has a stake in the buyer's business and recoups his loss of low price there, leaving the govt short changed? This risk is also at the ceiling price, as in power and fertiliser plants, where fuel is pass through costs, the higher revenue shared could be offset by higher subsidies to those plants. The current PSCs overcome this by insisting on transparent arms length sales and one hopes that some safeguard will be introduced to ensure really competitive prices and prevent sweet-heart deals.

On the ceiling price itself, it should be noted that that this provision to some extent dilutes the free pricing principle, even if it is for difficult and deep prospects. One could take a view on self sufficiency, even at a cost. The other view could be that when cheaper alternatives are available, why strain oneself for costlier options, which ultimately burden the consumer and the economy.

For a good energy market to develop in this country with the dominant use of coal with its large resource base, coal price should cap the gas price, or for that matter, any other alternative fuel. This would be a sound policy and in fact the erstwhile Planning Commission had gone on record with this view. As the policy evolves, it would be better to drop the cheaper but dirty fuel oil and the costlier naptha which is better put to more value-added use than for burning that has the least imputed economic value.

The curious case of Ratna series calls for some comment. Initially, its award got embroiled in corporate rivalry, with a not-so-neutral government as referee. Then it got into several other problems with no decision. Without going into its merits, one should see here how the country has been a loser. This was part of a group of discovered fields, stagnant in production and languishing for want of capital, technology and management and offered to attract both overseas and Indian private players.

With majority participation with the PSUs, those PSCs have a technology transfer clause, so the oil PSUs could absorb the technology and adopt in the fields they are operating. These few fields so offered formed less than 10% of the country's producing fields. After more than two decades of their operation, it is seen that these were the only fields which not only increased production but also added reserves. The country's hopes of replicating this in the rest of the 90% fields have been mostly belied.

Ratna suffers from a double whammy. Not only was it denied the capital and technology infusion, it also now suffers from another geological imperative. Any reservoir, once punctured but subsequently sealed, without drawing a drop of oil or gas, suffers an annual decline of 4-5% in in its reservoir pressure and consequently in recovery. This is a geological phenomenon which no one can reverse. For two decades it has been lying unattended and if there is one field that needs the best attention, it would be this. Merely restoring the status quo ante is not a solution, much less an answer to the great damage done to the field.

TNR Rao is former petroleum secretary of the government of India.