NEW DELHI: State oil firms plan to raise petrol prices after the end of the budget session of Parliament this month and revise them every fortnight to recover 5,000 crore past revenue losses as they haven’t increased rates since December due to political pressure.
So far, the oil ministry has not allowed oil firms to exercise their freedom to raise petrol prices as per a Cabinet decision. The ministry informally advises companies to postpone the decision because of political considerations.
Senior executives at Indian Oil, Hindustan Petroleum and Bharat Petroleum say the companies want to align pump prices of petrol with market rates by an immediate hike of 7 per litre and also recover part of five-month old dues by an additional hike of at least 1 a litre.
If petrol prices are raised by 8 a litre, the net impact after taxes would raise the price inDelhiby about 9.6 per litre. The fuel is currently sold at 65.64 per litre inNew Delhi.
“The government is not willing to compensate us for our losses on petrol as it is a deregulated fuel. We can’t absorb the losses in our accounts. We have to pass it to consumers in small installments,” chairman of an oil company said, requesting anonymity.
But oil ministry officials do not rule out political interference again this time to stop a steep price hike, especially in the light of forthcoming presidential elections. “Oil PSUs’ demand is legitimate.
Either the government compensates them for their losses on petrol or allows them to recover their losses, retrospectively. But everything will depend on political will,” said an oil ministry official who did not wish to be named. Incumbent President Pratibha Patil’s term will end in July.
Minister of state for petroleum RPN Singh told the Rajya Sabha last week that oil companies have suggested either declaring petrol as a regulated product “temporarily” or reducing excise duty on petrol from 14.78 per litre by an amount equivalent to their revenue losses . “Ministry of petroleum has taken up the matter with the ministry of finance,” Singh said.
Singh told Parliament that “even after implementation of the market-determined pricing, the oil marketing companies have been making price revisions of petrol in a guarded manner, at times, absorbing a part of under-recovery themselves.” He said last week that IOC was incurring a revenue loss of 7.17 per litre on sale of petrol.
State oil firms could not raise petrol rates under tacit directive from the UPA government initially to brighten its prospects in assembly elections in Punjab, Uttar Pradesh, Uttarakhand andGoa. But they were not allowed to raise petrol prices even after assembly elections as the government did not want to risk passage of crucial Union budget in Parliament fearing stiff opposition by its allies such as Trinamool Congress and DMK.
State fuel retailers are also losing 13.91 per litre on diesel, 31.49 per litre on kerosene and 480.50 per cylinder on cooking gas.
The oil ministry is planning to convene a meeting of the empowered group of ministers soon after the Parliament session to raise prices of regulated fuels, such as diesel and cooking gas. It is also persuading the finance ministry to exempt oil marketing companies from sharing oil subsidy burden for the last quarter of 2011-12 so that they can make reasonable profits, ministry officials said.
State oil marketing companies have incurred a revenue loss of 1,38,541 crore in 2011-12. The government has already paid cash compensation of 45,000 crore to partially meet their revenue losses for first three quarters. State-run ONGC, Gail and OilIndiahave shared subsidy burden of 36,900 crore for nine months ended December 2011. There is no clarity on subsidy sharing of 56,641 crore for the last quarter.
“Unless upstream companies and the government share a large part of unmet under-recovery (revenue loss), all three firms will sink into red for the first time,” a senior executive of Mumbai-based oil marketing firm said. The three firms are schedule to announce their annual financial results this month.
MINISTRY SAYS NO TO OIL PSUS BUYING ADB STAKE IN PETRONET LNG
NEW DELHI: The Oil Ministry has refused permission to public sector oil companies for acquiring Asian Development Bank’s stake in Petronet LNG Ltd (PLL) so as to keep the nation’s largest liquefied natural gas importer a private company.
The ADB on August 23 last year offered to sell its 5.2 per cent stake in PLL, in which GAIL, Indian Oil (IOC), Bharat Petroleum (BPCL) and Oil and Natural Gas Corp (ONGC) hold 12.5 per cent stake each and have a first right of refusal.
The board of all the four promoter companies approved exercising the first right of refusal over ADB stake and cash buyout of the multilateral lending agency’s interest
However, the ministry, whose Secretary is the Chairman of PLL, vetoed the proposal at a March 26 meeting, sources privy to the development said.
“Keeping in view the specific approval of the Cabinet on restricting the aggregate Government/PSU participation to 50 per cent of paid-up capital for providing the desired flexibility to Petronet LNG Ltd to operate in a dynamic LNG import market, the existing shareholding structure in the context of PSU participation, should be retained,” minutes of the March 26 meeting stated.
If the ADB stake goes to state firms, PLL would come under scrutiny of official auditor CAG and CVC because of PSU holding exceeding 50 per cent, something that the company and the ministry was opposed to.
The ministry has instead asked the PSUs to offer the ADB stake to a strategic investor, like am LNG supplier, they said.
“The Boards of respective promoter companies would deliberate and decide upon an option which would add long-term value to the business of PLL,” the minutes stated.
It remains to be seen how the state firms, whose boards have approved of buying ADB stake in proportion of their shareholding, would justify the move.
Sources said the ministry is keen on offering the ADB stake toQatarin lieu of getting an additional 5 million tons a year of LNG supplies on a long-term contract.
But companies like GAIL are opposed to the idea unlessQataragrees to sell LNG at a discount to its current asking price of an equivalent to 14.5 per cent of the ruling global oil price, which translates into over four times the predominant domestic price of USD 4.2 per million British thermal unit.
Oil Minister S Jaipal Reddy is believed to be against the idea of overriding the interest of GAIL, IOC, BPCL and ONGC.
Gaz de France International (GDFI) holds a 10% in PLL and also has the right of first refusal over ADB’s stake. But the French energy giant has decided to waive this off.
ADB’s 5.2 per cent stake was to be split equally among the four PSU promoters.
OIL FIRMS TRY TO PUT A LID ON PETROL PRICES
NEW DELHI: PSU oil retailers have placed a suggestion before the government on petrol, which may stave off a price hike of the fuel.
Sources said the firms had asked the government to either declare petrol a “regulated” product, temporarily, in line with diesel, kerosene and LPG, and provide cash compensation for under-recovery; another option put forward is to pay less excise duty on the fuel to the extent of under-recovery.
The PSUs expect the finance ministry to provide some relief to stop a price hike, sources said.
A petrol price hike is on the agenda of the PSUs since the passage of the finance bill in the Lok Sabha.
The three PSU oil marketing firms — Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation — review prices on a fortnightly basis and take a call on increasing it after consulting the government.
According to oil ministry officials, Rs 4,000 crore have been sought from the finance ministry to compensate the three PSUs for petrol under-recoveries in 2011-12.
The trio have lost Rs 4,859 crore by selling petrol below cost in the previous fiscal over and above the Rs 138,541 crore lost from selling diesel, domestic LPG and kerosene below market price.
The oil companies have not increased petrol prices since December because of the Assembly polls and opposition from UPA ally Trinamul Congress.
Petrol is being sold at a loss of over Rs 7 per litre. After adding local sales tax, or value-added tax, the desired price increase inDelhiwill be Rs 8.60 a litre. Since oil firms cannot pass on the hike to consumers at one go, they are seeking compensation from the Centre.
The government, the majority stakeholder in these firms, had deregulated petrol in June 2010 and does not compensate losses on the fuel since then.
The PSUs have been adjusting the prices periodically but they have rarely moved in tandem with the cost.
The price was last revised on December 1 when the imported cost of the fuel was $109.30 a barrel. Since then, global gasoline prices in theSingaporespot market —the benchmark for these firms — have climbed to about $120 per barrel.
Oil PSUs are losing Rs 13.91 per litre on diesel, Rs 31.49 per litre on kerosene and Rs 480 on each domestic LPG cylinder.
The Indian basket of crude has averaged $117.64 per barrel so far in this fiscal, up over 5 per cent from the previous fiscal’s average of $111.89. With the rupee depreciation, the actual impact is much higher.
The revenue loss for selling diesel, kerosene and domestic cylinders in 2011-12 stood at Rs 138,541 crore, which is 77 per cent more than Rs 78,190 crore in the previous fiscal.
ONGC MAY TAKE A CALL ON METHANE BLOCKS SOON
KOLKATA: After prolonged delay, ONGC may be gearing up to take a call on the farm-in opportunities in its four coal bed methane blocks inWest Bengaland Jharkhand soon, according to sources. Expectations are rife that the issue may even come up for discussion during the scheduled ONGC board meet on May 15.
As in November 2011, the oil and gas major received four expressions of interests (EoI) from private players to pick up equity stake and help ONGC in monetising the CBM assets.
Among the interested parties, are Great Eastern Energy Corporation (GEECL), Australia-headquartered Dart Energy (formerly Arrow), Essar Oil and a consortium of Jindal Steel and Deep Industries.
Of the four blocks, Jharia and Ranigunj (North) were awarded to ONGC on nomination basis in 2003. Bokaro andNorth Karanpurawere awarded in 2002.
The pubic sector major has so far been successful in producing minuscule quantities of gas from the most prolific Jharia asset. A $200-million development programme, launched in the block in 2007, to prop up production to 3.5 lakh standard cubic metres a day yielded little result.
Though large quantities of in-place reserves of CBM were also identified in Bokaro, the field is yet to be developed.
In comparison the Delhi-headquartered GEECL began commercial production from the Ranigunj (South) nomination block inWest Bengalas early as in 2007. Essar Oil too started production from Ranigunj (East).
Dart, the biggest of the four, has more than 50 CBM and shale gas assets in India, Australia, China, Indonesia, the UK, Poland, Germany and Belgium. The company also has a technical cooperation with ONGC.
CORPORATE APATHY RENDERS CULTURE FUND REDUNDANT
NEW DELHI: The National Culture Fund (NCF), set up with much fanfare in 1996, has utterly failed in its aim to preserve and promote Indian culture with the help of public private partnership (PPP) owing to the dismal response from the PSUs and corporate sector.
Data from the last three years show that only five PSUs — Gas Authority of India Ltd (GAIL), National Thermal Power Corporation Ltd (NTPC), Oil and Natural Gas Commission (ONGC), State Bank of India (SBI), and Shipping Corporation, have committed financial assistance, though not very huge, to the fund.
“The scheme has failed to evoke response from the corporate sectors to donate liberally even though the Government provides income- tax exemption for donations,” a senior official from the Culture Ministry said. The NCF has Rs 19 crore in its corpus fund.
The reluctance aside, the PSUs also double back on their donation promises many a times. Of a total Rs 8 crore promised by them in the last three years, a mere Rs 2 crore has been released so far.
The NTPC has been the major defaulter. Against Rs 5 crore committed in 2009-10, it has released a paltry sum of Rs 50 lakhs for the conservation and development of environs of monuments in Madhya Pradesh, Uttarakhand and Odisha, the official pointed out.
Similarly, the country’s premier bank, SBI’s record for meeting its commitment has been dismal. It has provided a token amount of Rs 20 lakhs against promised fund of Rs 75 lakhs for undertaking conservation, provision of amenities for tourists, illumination of the monument and professional advice for museums display atHazaraduraiPalacein Murshrabad inWest Bengal.
The major oil PSU, ONGC has promised monetary support of around Rs 90 lakhs in 2010-2011 to three projects related to Ahom monuments in Sibasagar inAssam, Delhi-basedNationalMuseumandfor the festival titled “Virasat” in Dehradun in Uttarkhand. It is yet to release Rs 15 lakhs out of promised fund of Rs 40 lakhs for the third one, said the official.
For 2011-12, only SBI has come forward to fund two projects; namely construction of a toilet block in the Shore temple (Rs 25 lakhs) and landscaping and signages for groups of temples in Mahabalipuram in Tamil Nadu (Rs 54 lakhs.) It is yet to release the money for the second project.
“In European countries, the upkeep of the monuments is with the help of such funds. But unfortunately corporate entities here are least interested in keeping the heritage of the Indian culture alive,” the official lamented.
IOC SHEDS ITS CONSERVATIVE IMAGE
NEW DELHI: Indian Oil Corporation (IOC), the country’s largest public sector refiner, is shedding its conservative and cautious image.
Compelled to meet domestic requirements first, the company is reworking its refinery strategy which will allow it greater flexibility in deciding crude oil sourcing and eventually cut down operating costs.
Mr Rajkumar Ghosh, Director (Refineries), Indian Oil, said, “The company is evaluating its refinery capacity – adding new capacity or up gradation of existing refineries – based on the assessments given by our marketing division.”
IOC proposes to expand theGujaratrefinery from the current 13.7 million tonne a year to 18 mt by 2016-17. Other expansions include Panipat to 18 mt,Mathurato 11 mt and a grassroot refinery in the West Coast with a capacity of 15 mt.
The capacity augmentation is being done in such a way that refineries are able to process any kind of crude – from heavy to light.
But, unlike their private sector counterparts, public sector refiners have to first cater to domestic demand, which means assured supply of crude oil (term-contracts) should be in place, he said.
IOC has flexibility for only about 20 per cent of its total crude oil requirement to explore other crude baskets. In 2011-12, including Chennai Petroleum Corporation, IOC as a group imported 65.7 million tonne of crude. Of this, almost 40 million tonne was from term contracts with National Oil Companies of countries such asIraq,Kuwait,Saudi Arabia, the UAE. Almost 12-15 million tonne came from domestic sources (including Cairn).
IOC can process heavy crude at its refineries at Panipat andGujarat. Further, theGujaratrefinery configuration is being so done that it can process any variety of crude. “Other refineries of the company can also process all types of crude but there are environmental stipulations that need to be followed. Refineries inIndiacannot burn sulphur beyond a limit,” Mr Ghosh, said.
While the domestic private sector refiners like Reliance Industries Ltd (RIL) have been processing heavier crude, IOC has now started processing heavier crude fromMexico(Maya) and Ras Garib (Egyptian).
Cheaper than the light, sweet crude, the wider spectrum of crude variety gives IOC a competitive advantage. Besides, it also brings down the refinery costs.
The heavy crude is almost 10-14 per cent cheaper than other crude varieties, an official said. While Maya is almost $ 11 a barrel cheaper than Brent, Ras Garib is cheaper by $ 4 a barrel fromDubaiprice. From April-till May 11, 2012,Dubaicrude averaged $115.84 a barrel, while Brent has averaged at $ 118.13 a barrel.
IOC GETS NEW ED (SOUTH)
CHENNAI: Mr Suresh Kumar takes over as IOC’s ED for south. Services of Southern Region of Indian Oil Corporation Ltd. comprising Tamil Nadu, Andhra Pradesh, Karnataka and Kerala and theUnionTerritoriesof Puducherry andLakshadweep. Mr Suresh Kumar is also the Regional Level Coordinator for Oil Industry, Southern Region representing the PSU Oil Companies in these States. Prior to this posting, he was Managing Director of Lanka IOC Limited, a subsidiary of Indian Oil Corporation Limited inSri Lanka. Mr Suresh Kumar has worked across several functions in Indian Oil including Lubes and Retail Sales. He was instrumental in taking initiatives inSri Lanka, including expansion of retail network, entering new business segments and building infrastructure at Oil Storage Terminal atTrincomalee,Sri Lanka.
ESSAR OIL Q4 LOSS AT RS 515 CRORE
MUMBAI: Essar Oil on Sunday reported a net loss of 515 crore for the March quarter, against a net profit of 321 crore in the year-ago period, despite a 29% growth in gross revenues to 19,160 crore.
Essar Oil managing director and chief executive L K Gupta attributed the loss to expenditure on corporate debt restructuring as well as non-availability of sales tax benefits. He said it has already provided 4,015 crore as an exceptional item in its books as reversal of sales tax incentive income in the third quarter.
Considering the net accretion of 53 crore in the fourth quarter on account of defeasement, the net reversal for the year is 39.62 crore. The gross refinery margin stood at $4.60 a barrel, compared to $5.29 a year ago, he said.
“We had to spend a considerable amount on corporate debt restructuring. Also, we could not avail of sales tax benefits this time. But during the year, we completed our refinery expansion programme, making us the second largest single-location refinery in the country and one of the most complex refineries in the world. After our optimisation programme is complete, we will be fully focused on delivering the value of investments to stakeholders,” he said. He also said the company may raise equity after the capacity expansion and optimisation programmes are over.
FUELLING SPECULATION ON OIL AND GAS RESERVES?
The valuation and stakeholder focus in an exploration and production company (EPC) is completely on its oil and gas reserves. These are measured either on a participating interest basis or an entitlement interest basis. Different enterprises follow different practices, which have a significant impact on financial statements.
EPCs usually form joint ventures with other players in the industry. The partners enter into a production sharing contract with the Government that specifies their rights and obligations with respect to the exploration/ development/ production activities at the hydrocarbon block.
The contract also spells out the interest that each of the venture partners would have in the block, which is generally referred to as the Participating Interest or Working Interest. The venture partners generally share all expenditure and revenues from the block in the ratio of their respective PIs. The Government is entitled to a share of revenue (in the case of a producing block), which is referred to as profit petroleum.
Profit petroleum is often paid as a percentage of profits, and the percentage is usually a progressive one — that is, it increases with increasing profit according to the terms of the contract. Consequently, the venture partners’ revenues are reduced.
The share of revenue accruing to the venture partners after payment of profit petroleum and adjustments to cost recovery is referred to as the Entitlement Interest. The Government’s share in revenues from oil and gas activities is usually large, sometimes as high as 70 per cent. Understandably, the impact of EI and WI on financial statements can be significant.
The Guidance Note on Accounting for Oil and Gas Producing Activities requires enterprises to disclose their interests in proved reserves and proved developed reserves of oil and gas. However, the note doesn’t state explicitly whether such an interest should be disclosed on WI or EI basis. Consequently, the quantum of reserves disclosed by an enterprise, which is an important piece of information in a financial statement, may not be comparable between entities.
A similar dichotomy exists in the accounting of revenue, inventory and depletion cost. The cost of depletion, which is significant in an EPC, is dependent on the reserves under consideration and the use of different basis may yield significantly different results. A related issue is whether an enterprise should present its revenues on WI or EI basis.
Under WI, a company will present gross revenue, including the profit petroleum share of Government and present profit petroleum payable, as expense. Under EI, a company will only recognise net revenue. While this may not impact profits, it will impact the top-line.
The calculation of EI would entail significant assumptions, the most important being the price of crude, which is very subjective. But with adequate disclosure of the assumptions, it will make greater sense to those reading the financial statement.
The Institute of Chartered Accountants of India may consider clarifying this aspect in the revised Guidance Note on Accounting for Oil and Gas Producing Activities.
Naman Agarwal is a senior professional in a member firm of Ernst & Young Global.
POWER GENERATION — PRIORITISING GAS SUPPLIES
Gas utilisation policy should accord top priority to power companies
The government needs to tweak its gas utilisation policy to accord top priority to the power sector in allocation of domestic gas given its significance in the overall economic growth. Besides, it should also be kept in mind that there is no international market for electricity on which we can fall back in times of domestic shortage.
As of now, fertilisers get top priority, followed by the city gas distribution sector. Power sector, the biggest consumer of gas inIndia, comes third on the priority list for gas allocation despite its critical role in the national economy.
Significantly, the parliamentary standing committee on energy has also pushed for a policy change to accord top priority to the power sector in gas allocation. The House panel’s suggestion comes at a time when the power sector is facing a huge shortage of gas. Over 8,000 MW capacity is facing the threat of getting stranded due to non-availability of gas, according to the Association of Power Producers (APP), a body of private power companies.
The retail sale of fertilisers is subsidised, with the central government bearing the burden. That is the reason the fertiliser sector’s top priority in the government’s gas allocation policy. The city gas distribution project is considered necessary to keep vehicular pollution in check in cities. However, gas price is not an issue for the sector and it can easily absorb imported LNG.
While no one can dispute the merit of supplying subsidised fertilisers to farmers given the significance of food security to the country, it should nevertheless be kept in mind that fertilisers can always be imported to meet the shortfall in domestic production unlike electricity whose deficit cannot be met through free trade.
It is true thatIndiaimports electricity fromBhutan. In future, it can also import electricity from other neighbouring countries likeNepal. However, it should be understood that this is not import of electricity from the free market. Rather, Indian companies have invested huge money in power plants inBhutanand in return, they can export toIndiasurplus power, which is dwindling day by day.
Besides, there is a direct correlation between the power sector’s growth and GDP growth. IfIndiawants to grow at 8-10% annually, the power sector must grow at a matching pace. A slowdown in the power sector will definitely drag down the overall economic growth.
It is true that the central government bears fertiliser subsidy and that it has every right to rationalise the input cost for the industry so that it subsidy burden does not become far too high. But at the same time, it should also be remembered that state governments subsidise electricity sale to farmers. Most states are unable to fully compensate their discoms for the sale of subsidised power to the agriculture sector. Nor do they allow discoms to hike tariff. As a result, the discoms are facing the threat of financial collapse. Power discoms’ combined losses are estimated to have piled up to R2 lakh crore, according to Crisil, a rating agency.
So, if the Centre wants to keep the cost of fertiliser production low by diverting cheaper gas to urea manufacturing units, power plants will have to run either on imported LNG or liquid fuels, both remain prohibitively costly. That will in turn increase discoms’ power purchase cost. But will the government change its gas utilisation policy?
RIDING THE SHALE GAS REVOLUTION
India must take advantage of low US gas prices by setting up fertiliser plants in America
With growing reports of shale gas discoveries and probable recoveries in diverse locations includingArgentina,China, East Europe and (especially) theUnited States,Indianeeds to consider the possible ways it can leverage the strategic implications of this major new development in global energy markets.
For one, if the recoverable shale gas inChinaand theUSproves to be as large as some estimates project, their dependence onMiddle Eastenergy will drop. This could reduce the strategic importance of theMiddle Eastto American interests. And Indian strategic thinkers who had thought (or hoped) that dependence on Middle East oil would make Chinese supply lines through the Indian Ocean vulnerable might have to dampen these expectations.
On the other hand, the shift to domestic gas sources by two of the world’s largest energy consumers will by itself attenuate projected increases in energy prices, especially in substitutes like oil and coal, which would mitigate India’s burgeoning energy import bill. But this will not change the fundamental reality thatIndiafaces: a growing demand-supply energy imbalance whose implications for economic growth and national security are profound.
ButIndiacan be more proactive and leverage this new development to greater advantage, in particular by rethinking its stance on fertiliser production and imports. While there are several hydrocarbon feedstocks for fertilisers, including naphtha, fuel oil/low sulphur heavy stock (FO/LSHS), and coal gasification, the most preferred feedstock is natural gas, since it has the highest hydrogen-to-carbon ratio (hydrogen’s percentage by weight in methane is 25 per cent as compared to 15 per cent in naphtha).
While about 30 per cent ofIndia’s domestic production of natural gas is used for fertiliser production, the scope for increasing this is restricted by the limited supply of gas. Hopes that Reliance’s Krishna-Godavari fields would be a major supplier have been dashed — either since the estimates of the gas fields were too optimistic or because Reliance is simply playing hardball to extract a higher gas price. (The latter is more likely, given BP’s decision to invest $7 billion, or Rs 38,000 crore, for a 30 per cent stake in Reliance’s 21 oil and gas production-sharing contracts.) Priority sectors like power and fertilisers that built capacity on the promise of assured supplies now have to scramble to find alternative fuel and feedstock.
The need to lower the cost of fertilisers is further underscored by escalating fertiliser subsidies. In the last financial year, these (including arrears) approached nearly $20 billion (Rs 1 lakh crore). Given uncertainties in the supply and pricing of feedstock, together with micro-managed fertiliser prices, it is not surprising that there has been no new investment in urea inIndiasince the late 1990s.
Urea production costs in India vary considerably between the gas-based plants located at gas landfall sites (such as Kribhco at Hazira and Nagarjuna Fertilisers at Kakinada), which can access the cheapest gas; gas-based plants located in the interior that incur additional costs of pipeline transport and taxes, or even buy merchant liquefied natural gas (LNG) at very high rates; and the highest-cost plants (more than double) running on naphtha and fuel oil. Given the large differences in the price of natural gas between the point of production and off-take, and the continued existence of much higher-cost non-gas based plants, the question should be asked: is it not better to establish dedicated production facilities overseas, in close proximity to gas production sites?Indiahas consistently resisted this on the grounds of food security. This stance has changed gradually since the late 1990s; but, to date, there has been only one significant success story — OMIFCO, a joint venture between Oman Oil Company and India’s IFFCO and Kribhco.
The plant was started inOmanin 2005. While the government ofIndiaagreed to buy all the urea produced by OMIFCO under a long-term urea off-take agreement for 15 years at predetermined prices,Omanhad contracted to sell gas to OMIFCO at $0.77 per million British thermal units for 15 years in 2002. As per the contract, the price revision was due only in July 2015, after 10 years of the commencement of the plant.
However, with escalating global gas prices,Omantrebled the price of gas ahead of schedule. Nonetheless, even with this unilateral gas price hike, the price of urea from this plant will be considerably less than world prices, with savings to the government of several hundred million dollars annually.
Still, until now, a case could be made for the Indian government to be cautious. The only viable option for large urea plants was in the Middle East, where political risks stemming from security vulnerabilities and unilateral and capricious state actions (such as reneging on contracts) meant that putting too many eggs in this basket carried considerable risks.
However, the discovery of vast reserves of extractable shale gas in theUSconsiderably changes the picture. For the first time, the pricing of natural gas in theUShas been delinked from oil parity pricing, leading to much lower natural gas prices in theUScompared toAsia. While both Indian private firms and PSUs have been making investments inUSshale gas assets (notably RIL and GAIL), a critical pillar of a long-term strategy should be to set up urea plants in theUSbased on shale gas feedstock, with guaranteed off-take by the government at predetermined, contracted prices.
There are several key advantages of this strategy. First, it will ensure urea supplies at costs considerably lower than inIndia, even taking into account transportation costs, thereby lowering the subsidy bill. Hence, instead of throwing good money after bad and attempting to revive sick fertiliser units (as currently planned), India should instead invest in fertiliser-manufacturing facilities in the US. Second, it will diversify the sources of gas (and urea) supply. This should enhanceIndia’s bargaining power vis-à-vis domestic producers like Reliance, and also in gas contract negotiations withMiddle Eastcountries. Third, given private ownership of mineral rights in theUSand a strong property rights and contract enforcement regime,Indiawill have long-term supply assurance that contracts are not annulled by fiat or inflation. This is critical since, asOmanand indeed the Indian government’s own actions vis-à-vis foreign companies have recently demonstrated, sovereigns can be capricious when the asset is in their country.
Finally, such a strategy would also add ballast to the India-US economic partnership.Indiawould not be simply availing itself of cheap energy; instead, it would be contributing to a revitalised US manufacturing sector and deepening its trade relations with that country — even as it would be helping itself.
The writer is director of the Centre for the Advanced Study of India at theUniversityofPennsylvania
OIL SLIPS ON GREEK WORRIES, SAUDI CALL FOR LOWER PRICES
SINGAPORE: Oil fell in Asian trade Monday amid mounting worries over Europe’s debt crisis and calls by major crude producerSaudi Arabiafor prices to fall further, analysts said.
New York’s main contract West Texas Intermediate crude for delivery in June was down 84 cents to $95.29 per barrel while Brent North Sea crude for June shed 41 cents to $111.85 in morning trade.
Debt-ladenGreece’s political crisis is at the centre of investors’ thoughts after emergency talks between party leaders failed to forge a unity cabinet, making the prospect of new elections increasingly likely.
“As always withGreeceit’s not about one peripheral European economy but the widespread contagion on fellow members,” said Justin Harper, market strategist at IG Markets Singapore.
“Spain,ItalyandPortugalare also sources of constant concern,” he added.
Market sentiment was also weighed down by a Saudi call for crude prices to fall further.
“We need to get prices at a level around $100. Now, it is still high,” Saudi oil minister Ali al-Naimi was quoted as saying on Sunday by Dow Jones Newswires.
He was referring directly to Brent crude, the most widely traded oil contract worldwide.
Speaking to reporters inAustralia, al-Naimi added that global crude stocks were likely to increase ahead of an anticipated seasonal rebound in demand starting from July.
“It is very important to recognise that supply today is 1.3 million to 1.5 million barrels per day over demand, which is good. It is going into inventory and bringing inventory up — that should give comfort to consuming countries,” al-Naimi said.