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Mar 2016
What kind of flexibility is to be provided to an operator through the PSC mechanism to get the deepwater discoveries off the ground after the gas pricing issue is settled?
8It is clear that an operator is unlikely to go into production until he gets a return on his investment. Unless clear price signals are available, it will difficult to pin down a date on which a positive break even is guaranteed for him to begin investing money.
8Most discoveries will only get into production by 2020. So the likely price that will prevail at that point in time will be the relevant parameter for the operator to take a decision to invest.
8A few operators are speaking of forward contracts with equipment and service providers. Given the distress in which the suppliers are in, they are willing to try out innovative contracts and domestic E&P operators are of the view that now is the time to get them done. For example, an operator can commit to using a deepwater rig for a 24-month period within a three year time slot. The time slot is to be chosen by the operator when he finds the conditions favorable to begin development work in his discoveries.
8Given the current low prices for equipment and services, the operator can pin down a bulk of their capex commitments in the future through forward contracts without a specific deployment date in mind. Also, some operators are looking at another 15 to 20% drop in equipment and service costs and they want to wait for this to happen before placing orders.
8However, what the operator will need is flexibility in the existing PSC so that he can make the best of the low prevailing prices for equipment and services and pick up flexible options for future development work.
8The system will have to build in an element of trust. Already a large quantum of money had been invested in getting to the discovery stage. The sunk cost is high for an operator when he goes from exploration to the discovery stage in a deepwater block.
8It will be in the operator's best interest to get the discovery off the ground as soon as possible and the government will do well to repose trust in his judgment to do so than keep him bound and beholden to a set of inflexible rules.
8Needless to say an operator cannot take an infinitely long time to make up his mind, and caveats have to inserted to ensure that there is no willful default.
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8It is clear that an operator is unlikely to go into production until he gets a return on his investment. Unless clear price signals are available, it will difficult to pin down a date on which a positive break even is guaranteed for him to begin investing money.
8Most discoveries will only get into production by 2020. So the likely price that will prevail at that point in time will be the relevant parameter for the operator to take a decision to invest.
8A few operators are speaking of forward contracts with equipment and service providers. Given the distress in which the suppliers are in, they are willing to try out innovative contracts and domestic E&P operators are of the view that now is the time to get them done. For example, an operator can commit to using a deepwater rig for a 24-month period within a three year time slot. The time slot is to be chosen by the operator when he finds the conditions favorable to begin development work in his discoveries.
8Given the current low prices for equipment and services, the operator can pin down a bulk of their capex commitments in the future through forward contracts without a specific deployment date in mind. Also, some operators are looking at another 15 to 20% drop in equipment and service costs and they want to wait for this to happen before placing orders.
8However, what the operator will need is flexibility in the existing PSC so that he can make the best of the low prevailing prices for equipment and services and pick up flexible options for future development work.
8The system will have to build in an element of trust. Already a large quantum of money had been invested in getting to the discovery stage. The sunk cost is high for an operator when he goes from exploration to the discovery stage in a deepwater block.
8It will be in the operator's best interest to get the discovery off the ground as soon as possible and the government will do well to repose trust in his judgment to do so than keep him bound and beholden to a set of inflexible rules.
8Needless to say an operator cannot take an infinitely long time to make up his mind, and caveats have to inserted to ensure that there is no willful default.
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From the finance minister's statement, it looks like the government is going to drop the arbitrary cut off point of November, 2014, only after which offshore gas discoveries are entitled to the "premium" on gas price.
8The government was earlier insistent that a "premium" should be available for discoveries after November, 2014. This was an arbitrary cut off point arrived at by the bureaucrats in the petroleum ministry for those who would be entitled to the "premium" and those who would not.
8The finance minister budget declaration incentivise "gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of higher cost and higher risks".
8This statement seems to include all discoveries and not just those after November, 2014 which would be entitled to the new gas price that will have the landed price of alternative fuels as the ceiling price.
8In any case, now that none of the earlier gas discoveries have come on stream, it will perhaps not be fair to impose an arbitrary cut off line.
8Then again, the new policy will also have to lay down time limits, once the new gas pricing policy is announced, by when these discoveries should be put to production.
8Some companies are waiting for the prices of equipment and services to fall by another 15 to 20% and since this will have a big impact on cost economics, they are likely to seek flexibility in the timeline by when first gas out of these discoveries will have to be produced.
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8The government was earlier insistent that a "premium" should be available for discoveries after November, 2014. This was an arbitrary cut off point arrived at by the bureaucrats in the petroleum ministry for those who would be entitled to the "premium" and those who would not.
8The finance minister budget declaration incentivise "gas production from deep-water, ultra deep-water and high pressure-high temperature areas, which are presently not exploited on account of higher cost and higher risks".
8This statement seems to include all discoveries and not just those after November, 2014 which would be entitled to the new gas price that will have the landed price of alternative fuels as the ceiling price.
8In any case, now that none of the earlier gas discoveries have come on stream, it will perhaps not be fair to impose an arbitrary cut off line.
8Then again, the new policy will also have to lay down time limits, once the new gas pricing policy is announced, by when these discoveries should be put to production.
8Some companies are waiting for the prices of equipment and services to fall by another 15 to 20% and since this will have a big impact on cost economics, they are likely to seek flexibility in the timeline by when first gas out of these discoveries will have to be produced.
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Just fixing a ceiling price of gas may not be enough to push operators to kick start work on producing gas from their deepwater discoveries.
8The government will have to put together other complementary measures.
8Given the current scenario, implementing PSC timelines mindlessly makes little sense. The PSC timelines will have to be made more flexible.
8Most operators will have to pay fines since the PSC timelines for getting the deepwater discoveries to production are already over.
8Fines will only chase away the few remaining players still invested in the sector with little hope of getting any new ones in so far.
8In a situation when any new bid round will hardly attract any investors, the government may therefore need to think of modifying the terms of the Production Sharing Regime (PSC) to take into account delays in the implementation of the development plan on account of the challenges faced in making such projects viable. There have been precedents for such modifications such as when a "Rig Holiday" was allowed in the past to take into account the acute shortage of drilling rigs.
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8The government will have to put together other complementary measures.
8Given the current scenario, implementing PSC timelines mindlessly makes little sense. The PSC timelines will have to be made more flexible.
8Most operators will have to pay fines since the PSC timelines for getting the deepwater discoveries to production are already over.
8Fines will only chase away the few remaining players still invested in the sector with little hope of getting any new ones in so far.
8In a situation when any new bid round will hardly attract any investors, the government may therefore need to think of modifying the terms of the Production Sharing Regime (PSC) to take into account delays in the implementation of the development plan on account of the challenges faced in making such projects viable. There have been precedents for such modifications such as when a "Rig Holiday" was allowed in the past to take into account the acute shortage of drilling rigs.
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The Modi government is very keen to get foreign national oil companies and multinationals to invest in filling up new strategic storage facilities now being completed in India.
8The storages are getting commissioned in Vizag, Mangalore and Padur.
8That the government is banking on non-budgetary ways of funding the crude supply is evident from the fact that it has made no allocation under this head in the budget.
8What the finance minister has announced is that Section 10 of the Income Tax Act has been amended to provide exemption to incomes arising to a foreign company on account of storage of oil in these facilities. What is more, sale of crude from such strategic reserves in India will be allowed and income from them will stay exempted from IT provisions.
8But will that be enough to entice foreign companies to invest.
8The answer is "no".
8Click on Reports to find out more on what happened in discussions that once took place with the likes Chevron, Vitol, ANZ, Standard Chartered, JP Morgan, Bank of Tokyo, Mercuria Trading, BPCL, Kuwait Petroleum, Essar Oil, Trafugura, Stratoil, Morgan Stanley, BP, SOCAR Trading, ENI Trading and Morgan Stanley on evolving the right framework to attract foreign investment in this segment.
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8The storages are getting commissioned in Vizag, Mangalore and Padur.
8That the government is banking on non-budgetary ways of funding the crude supply is evident from the fact that it has made no allocation under this head in the budget.
8What the finance minister has announced is that Section 10 of the Income Tax Act has been amended to provide exemption to incomes arising to a foreign company on account of storage of oil in these facilities. What is more, sale of crude from such strategic reserves in India will be allowed and income from them will stay exempted from IT provisions.
8But will that be enough to entice foreign companies to invest.
8The answer is "no".
8Click on Reports to find out more on what happened in discussions that once took place with the likes Chevron, Vitol, ANZ, Standard Chartered, JP Morgan, Bank of Tokyo, Mercuria Trading, BPCL, Kuwait Petroleum, Essar Oil, Trafugura, Stratoil, Morgan Stanley, BP, SOCAR Trading, ENI Trading and Morgan Stanley on evolving the right framework to attract foreign investment in this segment.
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UAE's national oil comnpany ADNOC and even Kuwait Petroleum Corporation have shown interest in using the capacities that are thrown open by strategic crude storage caverns.
8Discussions were held with them and ADNOC has evinced keen interest.
8The issues that needed hammering out boiled down to adequate tax exemption and unfettered entry and exist and a certain commitment from the India to offtake the reserves.
8Both the national oil companies have made it clear that they did not want the reserves to be just "dead" stocks.
8Find out more on what investors want. Also the government will have to amend several other Acts before foreign participation can become a reality.
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8Discussions were held with them and ADNOC has evinced keen interest.
8The issues that needed hammering out boiled down to adequate tax exemption and unfettered entry and exist and a certain commitment from the India to offtake the reserves.
8Both the national oil companies have made it clear that they did not want the reserves to be just "dead" stocks.
8Find out more on what investors want. Also the government will have to amend several other Acts before foreign participation can become a reality.
Click on Details for more Details
It looks like the markets have reacted badly to the imposition of a 20% cess on domestic crude oil production whereas the expectation was of a 10% levy to replace the prevailing fixed rate of Rs 4500 PMT.
8The ad-valorem rate was found to be far too steep.
8What the finance minister did was to translate the fixed rate straight into an ad-velorem rate that will yield the same tax revenue with a modest downward correction.
8The E&P industry had expected a deeper cut.
Good news for ONGC and OIL
8It is not all bad news however for ONGC and OIL who will be badly impacted by the imposition of the higher than anticipated cess on crude oil.
8For the public sector duo, the budget has ruled that goods required for exploration and production of hydrocarbon activities undertaken under Petroleum Exploration Licenses (PEL) or Mining Leases (ML) issued or renewed before 1st April 1999 will attract nil customs duty.
8Earlier zero customs duty concession was not available for nomination blocks and now it is.
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8The ad-valorem rate was found to be far too steep.
8What the finance minister did was to translate the fixed rate straight into an ad-velorem rate that will yield the same tax revenue with a modest downward correction.
8The E&P industry had expected a deeper cut.
Good news for ONGC and OIL
8It is not all bad news however for ONGC and OIL who will be badly impacted by the imposition of the higher than anticipated cess on crude oil.
8For the public sector duo, the budget has ruled that goods required for exploration and production of hydrocarbon activities undertaken under Petroleum Exploration Licenses (PEL) or Mining Leases (ML) issued or renewed before 1st April 1999 will attract nil customs duty.
8Earlier zero customs duty concession was not available for nomination blocks and now it is.
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The other big boost that the budget has conferred to the gas industry is to provide a clarification in Section 3 of the CST Act.
8The budget says, "Section 3 of the Central Sales Tax Act, 1956 being amended so as to insert an explanation: Explanation.- Where the gas sold or purchased and transported through a common carrier pipeline or any other common transport distribution systems becomes co-mingled and fungible with other gas in the pipeline or system and such gas is introduced into the pipeline or system in one State and is taken out from the pipeline in another State, such sale or purchase of gas shall be deemed to be a movement of goods from one state to another."
8So what in effect the clarification says is that molecular movement of gas is not needed and a contractual movement is good enough.
8This is going to be a welcome move and will greatly jelp improve the swapping of gas.
8A supplier of gas can now inject gas into any pipeline anywhere and sell it at the other end of any other connected pipeline.
8A big step indeed.
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8The budget says, "Section 3 of the Central Sales Tax Act, 1956 being amended so as to insert an explanation: Explanation.- Where the gas sold or purchased and transported through a common carrier pipeline or any other common transport distribution systems becomes co-mingled and fungible with other gas in the pipeline or system and such gas is introduced into the pipeline or system in one State and is taken out from the pipeline in another State, such sale or purchase of gas shall be deemed to be a movement of goods from one state to another."
8So what in effect the clarification says is that molecular movement of gas is not needed and a contractual movement is good enough.
8This is going to be a welcome move and will greatly jelp improve the swapping of gas.
8A supplier of gas can now inject gas into any pipeline anywhere and sell it at the other end of any other connected pipeline.
8A big step indeed.
Click on Reports for more Details
Oil Marketing Companies however showed gains as the government did not end up imposing the much anticipated 5% cess on crude oil. This has come a relief for the OMCs.
8The excise duty on Aviation Turbine Fuel Aviation Turbine Fuel other than for supply to Scheduled Commuter Airlines (SCA) from the Regional Connectivity Scheme airports has been raised from 8% to 14%.
8The budget has amended section 80-IB(9)(ii), (iv) & (v) of the Income tax Act so as to provide that no deduction will be available to an undertaking engaged in production of mineral oil or natural gas if the production commences on or after 1st April, 2017. The government had earlier promised tax exemption in some of the NELP rounds but seems to have backed off now.
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8The excise duty on Aviation Turbine Fuel Aviation Turbine Fuel other than for supply to Scheduled Commuter Airlines (SCA) from the Regional Connectivity Scheme airports has been raised from 8% to 14%.
8The budget has amended section 80-IB(9)(ii), (iv) & (v) of the Income tax Act so as to provide that no deduction will be available to an undertaking engaged in production of mineral oil or natural gas if the production commences on or after 1st April, 2017. The government had earlier promised tax exemption in some of the NELP rounds but seems to have backed off now.
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To provide a level playing field to Indian shipping lines vis-a-vis foreign shipping lines, the budget has allowed to zero rate the services provided by domestic lines by way of transportation of goods by a outgoing vessels with effect from 1 st March, 2016
8Then again, the budget has decided to impose a service tax on services provided by them by way of transportation of goods by a vessel from outside India up to the customs station in India with effect from 1st June, 2016 so as to complete the credit chain and enable Indian shipping lines to avail and utilize input tax credits.
8Excise duty has been exempted on capital goods and spares as well as raw materials, parts, material handling equipment and consumable sfor repair of ocean-going vessels by a ship repair unit subject to an actual user condition.
8The budget has also simplified the procedure for availment of exemption from Basic Customs Duty, CVD and SAD for ship repair units based on records and subject to actual user condition.
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8Then again, the budget has decided to impose a service tax on services provided by them by way of transportation of goods by a vessel from outside India up to the customs station in India with effect from 1st June, 2016 so as to complete the credit chain and enable Indian shipping lines to avail and utilize input tax credits.
8Excise duty has been exempted on capital goods and spares as well as raw materials, parts, material handling equipment and consumable sfor repair of ocean-going vessels by a ship repair unit subject to an actual user condition.
8The budget has also simplified the procedure for availment of exemption from Basic Customs Duty, CVD and SAD for ship repair units based on records and subject to actual user condition.
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Public sector spending by oil companies is to be stepped up to Rs 89,264 crore in 2016-17 in comparison to Rs 78,077 crore in the previous year.
8This step up is going to happen across the board, in downstream and upstream segments.
8The bulk of the investment is going to happen in the E&P sector, at Rs 60,131 crore in relation to Rs 56,291 crore in 2015-16.
8ONGC is the biggest spender, at Rs 29,207 crore in 2016-17. The company's investment was higher in 2015-16 at Rs 31, 467 crore but it is now trying to trim down capex by negotiating better rates with equipment and service suppliers. This explains the lower investment figure for next year.
8OIL's outlay will remain more or less the same as the previous year in 2016-17, at around Rs 11,300 crore.
8OVL is meant to invest Rs 14,843 as against the revised investment estimate of Rs 8488 crore in 2015-16
8The rest of the investment in E&P assets will be made by the public sector oil marketing companies
8OMCs are also investing Rs 24,845 crore in downstream capex as against Rs 18,909 crore in the 2015-16.
8IOC leads the pack with capital spending of Rs 10,082 crore in 2016-17 as against Rs 8662 crore in the previous year.
8BPCL is also going to be an equally big spender, at Rs 10,093 crore, significantly higher than Rs 6050 crore registered in the previous year.
8In comparison, HPCL's spending is going to be tepid at Rs 1907 crore in 2016-17 as against a mere Rs 1512 crore in 2015-16
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8This step up is going to happen across the board, in downstream and upstream segments.
8The bulk of the investment is going to happen in the E&P sector, at Rs 60,131 crore in relation to Rs 56,291 crore in 2015-16.
8ONGC is the biggest spender, at Rs 29,207 crore in 2016-17. The company's investment was higher in 2015-16 at Rs 31, 467 crore but it is now trying to trim down capex by negotiating better rates with equipment and service suppliers. This explains the lower investment figure for next year.
8OIL's outlay will remain more or less the same as the previous year in 2016-17, at around Rs 11,300 crore.
8OVL is meant to invest Rs 14,843 as against the revised investment estimate of Rs 8488 crore in 2015-16
8The rest of the investment in E&P assets will be made by the public sector oil marketing companies
8OMCs are also investing Rs 24,845 crore in downstream capex as against Rs 18,909 crore in the 2015-16.
8IOC leads the pack with capital spending of Rs 10,082 crore in 2016-17 as against Rs 8662 crore in the previous year.
8BPCL is also going to be an equally big spender, at Rs 10,093 crore, significantly higher than Rs 6050 crore registered in the previous year.
8In comparison, HPCL's spending is going to be tepid at Rs 1907 crore in 2016-17 as against a mere Rs 1512 crore in 2015-16
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The finance minister has allocated Rs 2000 crore in the budget to ensure that LPG connections are given to the poor in the country.
8But clearly this allocation will only be able to make a dent and little more, given that vast number of people who are without LPG connections.
8A survey covering the country's most deprived states of Bihar, Jharkhand, Madhya Pradesh, Uttar Pradesh, Odisha and West Bengal, which was released today by power minister Piyush Goel recently, did some extrapolation to claim that 800 million people have no access to LPG and they continue to use firewood, dung cakes, charcoal or crop residue to meet their cooking energy needs.
8Clearly India has a long way to go.
8The survey done along scientific lines have established that only 14 per cent households in rural areas across the six states have stated Biogas, LPG, Electricity or Natural Gas as their primary source of cooking.
8In sharp contrast, the total fraction of households in these states which were reported by oil marketing companies to have LPG connections ranged from 26 per cent in Jharkhand and Odisha to more than 50 per cent in Uttar Pradesh.
8Either the survey is wrong or the oil companies have trumped up the data. The divergence is too wide and a better investigation of the data has now become a prerequisite to establish the impact of LPG access and subsidy on India's poor.
8The budgetary allocation of Rs 2000 crore will be the first step to understand how it all pans out.
Click on Reports for more Details
8But clearly this allocation will only be able to make a dent and little more, given that vast number of people who are without LPG connections.
8A survey covering the country's most deprived states of Bihar, Jharkhand, Madhya Pradesh, Uttar Pradesh, Odisha and West Bengal, which was released today by power minister Piyush Goel recently, did some extrapolation to claim that 800 million people have no access to LPG and they continue to use firewood, dung cakes, charcoal or crop residue to meet their cooking energy needs.
8Clearly India has a long way to go.
8The survey done along scientific lines have established that only 14 per cent households in rural areas across the six states have stated Biogas, LPG, Electricity or Natural Gas as their primary source of cooking.
8In sharp contrast, the total fraction of households in these states which were reported by oil marketing companies to have LPG connections ranged from 26 per cent in Jharkhand and Odisha to more than 50 per cent in Uttar Pradesh.
8Either the survey is wrong or the oil companies have trumped up the data. The divergence is too wide and a better investigation of the data has now become a prerequisite to establish the impact of LPG access and subsidy on India's poor.
8The budgetary allocation of Rs 2000 crore will be the first step to understand how it all pans out.
Click on Reports for more Details
The survey has also gone on to show that more than three quarters of the rural households rely totally on traditional biomass for cooking.
8But the problem is that these rural poor would rather stick their traditional modes of cooking than opt for LPG.
8The high upfront cost to secure an LPG connection is cited as the biggest hurdle (for 95 per cent of households) to adopting LPG.
8Furthermore, the high recurring monthly expenditure (88 per cent), and lack of distributors for the fuel in the local area (72 per cent) were also stated to be significant impediments to LPG adoption.
8Moreover, there is poor awareness about adverse health impacts of the use of traditional chulhas.
8Nearly 45 per cent of households without an LPG connection are unaware of the positive health benefits of using LPG over traditional chulha.
8Such poor levels of awareness of the impact of cooking fuels on health, could also be a reason for the low demand and adoption of the clean fuel.
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8But the problem is that these rural poor would rather stick their traditional modes of cooking than opt for LPG.
8The high upfront cost to secure an LPG connection is cited as the biggest hurdle (for 95 per cent of households) to adopting LPG.
8Furthermore, the high recurring monthly expenditure (88 per cent), and lack of distributors for the fuel in the local area (72 per cent) were also stated to be significant impediments to LPG adoption.
8Moreover, there is poor awareness about adverse health impacts of the use of traditional chulhas.
8Nearly 45 per cent of households without an LPG connection are unaware of the positive health benefits of using LPG over traditional chulha.
8Such poor levels of awareness of the impact of cooking fuels on health, could also be a reason for the low demand and adoption of the clean fuel.
Click on Reports for more Details
Clearly, government intervention is a prerequisite in the provision of LPG to the poor and the Budget addresses the issue, though a lot more money will have to spend to ensure higher coverage.
8There is still not enough knowledge within the government on how these interventions should happen.
8The optimal route to help the poor to use LPG is till to be figured out.
8The survey shows that a vast mass of people cannot afford an LPG connection or a replacement of a cylinder. Even subsidized LPG is out of their reach and they will require a continuous infusion of money to be able to use LPG on a permanent basis until their income levels go up.
8Across the states, there is a divergence in opinion about the appropriate level of government intervention (in particular state vs. central government) that is needed to tackle the problem.
8However everyone was unanimous in the survey that households should have access to LPG.
Interestingly, improved biomass cooking stoves received a cold response from people in the survey, whereas biogas for cooking was not preferred at all.
8This reflects a loss of confidence in these technologies, stemming from the very limited successful experiences with them, despite three decades of dedicated programme implementation, leaving the government with no option but to push for LPG instead.
Click on Reports for more Details
8There is still not enough knowledge within the government on how these interventions should happen.
8The optimal route to help the poor to use LPG is till to be figured out.
8The survey shows that a vast mass of people cannot afford an LPG connection or a replacement of a cylinder. Even subsidized LPG is out of their reach and they will require a continuous infusion of money to be able to use LPG on a permanent basis until their income levels go up.
8Across the states, there is a divergence in opinion about the appropriate level of government intervention (in particular state vs. central government) that is needed to tackle the problem.
8However everyone was unanimous in the survey that households should have access to LPG.
Interestingly, improved biomass cooking stoves received a cold response from people in the survey, whereas biogas for cooking was not preferred at all.
8This reflects a loss of confidence in these technologies, stemming from the very limited successful experiences with them, despite three decades of dedicated programme implementation, leaving the government with no option but to push for LPG instead.
Click on Reports for more Details
