Action-backed Intent: A slew of policy measures to drive growth

A slew of policy measures to drive growth

As global crude prices remained benign over the past year, the government was proactive in fixing the issues that continued to impact the oil and gas sector. The past 12-18 months have been marked by a number of policy initiatives that were long awaited by the industry, in a bid towards rekindling investor interest in the space. However, the impact of these measures is yet to be seen. Besides, some of the challenges still remain unaddressed. Industry experts share their views on developments in the sector and the outlook for the near term…

How has the oil and gas sector progressed over the past year?

Dr A.K. Balyan

India’s oil and gas sector has witnessed a number of policy changes in recent times. After holding extensive stakeholder consultations to identify outstanding issues in the industry, the government has taken three main policy initiatives – the introduction of the Hydrocarbon Exploration and Licensing Policy (HELP), the Policy on Small and Marginal Fields, and the coal bed methane (CBM) policy. It is too early to expect results or see an impact of these policies. However, the industry has welcomed these changes and responded positively to them.

Ravichandran

The downstream sector did very well with record profits reported by public sector oil marketing companies. This was enabled by low oil prices, which further led to low under-recoveries on sensitive product sales. Moreover, their borrowing levels also came down sharply due to low working capital requirements and timely payment of subsidies.

In addition, vertical integration with the petrochemicals industry also helped bottom lines as petrochemicals’ margins were also robust. In contrast, the upstream sector continued to face challenges, despite some recovery in oil prices. Upstream companies’ profits and returns have been subdued despite significant cost-cutting efforts.

Oilfield services, especially drilling contractors, continued to reel under the excess supply of rigs and limited business opportunities, resulting in unremunerative charter rates and idle rigs. The midstream sector has had a turnaround with better offtake of long-term liquefied natural gas (LNG), following the renegotiation of the RasGas contract, and a sharp fall in spot LNG prices. Consequently, LNG regasification companies and marketers benefited. Nonetheless, gas transmission companies continued to be affected by the suboptimal utilisation of pipelines and and city gas distribution (CGD) companies by competition from cheaper liquid and solid fuels. Amidst these tumultuous events, the government’s policy support through several initiatives has been heartening for the industry.

Nitin Zamre

The oil and gas sector has seen mixed performance during the past year. Prices continued their downward trend. Domestic production did not pick up and demand did not show much growth. However, LNG imports took place due to the ongoing Power System Development Fund (PSDF) scheme which came to a close subsequently.

What have been the most impactful policy developments over the past year?

Dr A.K. Balyan

The new policy on small and marginal fields looks promising. It has been put into practice; however, its impact is yet to be seen. The new CBM policy has come up with positive changes such as marketing freedom and a market-driven price regime. In my opinion, this may be the first major policy change which has the potential to bring good results and credit to the government.

Ravichandran

The goods and services tax (GST), the Open Acreage Licence Policy (OALP), the early monetisation of CBM, the extension of production sharing contracts in pre-New Exploration Licensing Policy (NELP) blocks, and the purchase preference policy, linked with local

content for public sector units are the notable policy initiatives. While the GST will be beneficial for the larger economy over the medium to long term, its implementation will be a negative for the oil and gas sector due to the exclusion of five products (crude oil, natural gas, motor spirit, high speed diesel and aviation turbine fuel), which has brought with it several distortions for stakeholders.

The entire value chain will suffer from the excess input tax credit, which cannot be set off against output, besides dealing with the complexity of both the existing tax regime and GST. Due to tax distortions, industrial sales and margins of piped natural gas have taken a hit for the CGD industry, as they are unable to compete with cheaper liquid fuel on which the GST credit is available to end users.

With respect to other initiatives, the OALP is a progressive policy, though its success will depend on the quality of seismic data that can be offered to prospective bidders. The CBM policy and extension of production contracts for pre-NELP blocks are welcome measures which will provide flexibility to operators and enable them to better plan their development projects. That apart, the regular retail price increases of liquefied petroleum gas (LPG) (domestic) and public distribution system kerosene and a sharp cut in the allocation of the same have had a meaningful impact on the reduction in under-recoveries for the industry.

Nitin Zamre

The most important policy development has been on the awards made through the discovered marginal fields’ bidding round which saw a good response from niche private players. This development also tested the interest of players in the proposed revenue sharing contract (RSC), though one cannot extrapolate the interest for RSC to exploration blocks (given the risks in the latter). However, this is a good beginning. Similarly, the HELP and OALP announcements were significant developments. The recent announcement by the minister stating that mechanisms will be set up for gas price discovery is an extremely positive step.

What are the key challenges that remain unaddressed?

Dr A.K. Balyan

Unfortunately, there has not been any change/ new initiative in line with the government’s aim to become a gas-based economy. In fact, some of the decisions have been contradictory to this vision. For instance, a 2.5 per cent customs duty continues to be imposed on gas imports contrary to the expectations of a waiver by gas consumers. The introduction of the goods and services tax (GST) has actually enhanced the cost of the landed price of delivered gas/regasified liquefied natural gas (R-LNG) which has resulted in an increase in taxes from 15.5 per cent to 18 per cent on regasification and transportation cost. Also, CGD reforms are long awaited but no policy changes have taken place.

Gas consumers feel that transportation tariffs and taxes are generally high in India and contribute to a substantial part of the cost of landed gas. We are yet to see the impact of the GST on gas prices. Besides, no new gas pipeline has been completed in the past few years, resulting in stagnancy in this segment.

Meanwhile, the mechanism for domestic gas price fixation requires a relook. We should draw upon the knowledge on the gas pricing mechanism from similar large developing economies. In fact, India needs to develop its own benchmarks. The domestic gas prices are non-remunerative and do not incentivise or attract any future investments.

Stagnant domestic gas production and its pricing act as a deterrent for gas consumers. India has so far failed to take advantage of low international prices. No new reforms/policy changes have been witnessed in recent times in the two major gas consuming sectors – power and fertilisers. Long-discussed issues such as peak hour tariff and the gradual removal of subsidy and pass-through cost of the product still remain to be addressed.

Ravichandran

Since the impact of GST on the oil and gas industry is negative, the sooner the five omitted products are brought within the scope of GST or are zero-rated, the better for the industry.

The midstream sector has been facing several regulatory issues, especially on tariff setting, which has resulted in the incumbents being unable to achieve normative returns leading to several litigations. Hence it may be imperative to streamline the tariff norms so that the industry makes meaningful returns, which will further enable it to invest in other geographies.

Moreover, the CGD sector has witnessed a lukewarm bidding response in some of the new geographical areas (GAs) due to poor market potential and elevated competition for those GAs that have a high potential. The bidder selection criteria and the areas to be covered under the purview of CGD will require a significant overhaul for the “orderly” growth of the segment over the long term. Moreover, timely filling of vacancies at the Petroleum and Natural Gas Regulatory Board is necessary for speedy decision making.

Nitin Zamre

The major challenge that remains is in creating the demand and the availability of infrastructure. Access to infrastructure remains a concern. Taxation continues to be unfavourable as natural gas is outside the ambit of GST. So the fuel has a wide range of value added tax across states affecting its competitiveness. It has not been able to get any benefit of its environment- friendly nature.

What is the sector outlook for the next one-two years?

Dr. A.K. Balyan

In view of the low oil and gas prices, unless government-supported investments are made in the oil and gas sector and also in major consuming sectors, the market is expected to follow the wait-and-watch approach. I feel that the petrochemicals sector has the potential to act as a growth engine for the oil and gas industry.

Ravichandran

The outlook for the refining and marketing sector is positive, with healthy refining and marketing margins, with the exception of petrochemicals margins, which should moderate from the high levels seen in 2016-17.

The demand growth for petroleum products, which had been impacted in the fourth quarter of 2016-17 due to the demonetisation-related slowdown, should also pick up. With respect to the upstream sector and oilfield services, the outlook is negative due to weak oil and gas prices, subdued capital spending and excess capacity in the rigs market.

Nonetheless, capex commitments of the PSUs and the announcement of a capex revival by a private sector major should offer a ray of hope for vendors. With regard to the midstream segment, the profitability of the CGD sector will depend on how quickly they are able to pass on the GST-related under-recoveries to different customer segments. That apart, the outlook for regasification and gas transmission players should be positive due to the healthy demand for R-LNG and the minor rise in pipeline tariffs. However, the successful marketing of R-LNG volumes from Henry Hub-linked contracts, without compromising on the margins, is needed.

Nitin Zamre

Activities are likely to remain subdued in line with low oil (and gas) prices over the next couple of years. However, domestic action on the OALP, HELP, discovered small and marginal fields and pricing may generate some interest and investments.

 

“The new CBM policy has come up with positive changes such as marketing
freedom and a market-driven price regime. In my opinion, this may be the
first major policy change which has the potential to bring good results and
credit to the government.”

Dr A.K. Balyan, Chief Executive Officer, Oil and Gas, Reliance Group

 

“The outlook for the refining and marketing sector is positive, with healthy
refining and marketing margins, with the exception of petrochemicals margins,
which should moderate from the high levels seen in 2016-17.”

K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA Limited

 

“The major challenge that remains is in creating the demand and the availability
of infrastructure. Access to infrastructure remains a concern. Taxation
continues to be unfavourable as natural gas is outside the GST ambit.”

Nitin Zamre, Managing Director, ICF India