NEW DELHI: Ahead of Union Budget 2015-16, the petroleum ministry has made public a key report on oil sector reforms by a panel under former Finance Secretary Vijay Kelkar.
If implemented, these could bring down the country’s annual $150-billion oil import bill by at least $40 billion.
Among the 51 recommendations are implementing market-linked pricing of natural gas after the end of the current Plan period (March 2017), contract extension up to the economic life of the blocks, revamping bidding parameters under the New Exploration Licensing Policy and allowing the private sector to develop shale reserves in nominated blocks.
“The fair price for gas can only be the best price a gas molecule commands or the price that is market-determined in a transparent way, on an arm’s length basis. As the present generation is borrowing this finite resource from grandchildren, equity requires the future generation be fairly compensated,” the panel has said in a 111-page report, ‘Road map for reduction in import dependency in the hydrocarbon sector by 2030’.
As part of its suggestions on institutional reforms necessary to transform the sector, Kelkar has pitched for creating an empowered Cabinet Committee on Energy (CCE) for policy formulation and integration of energy related issues, making DGH an independent regulator for the upstream oil and gas sector rather than a mere advisor to the government besides empowerment of DGH along the lines of Sebi.
It has also called for creating an independent cadre of staff for the downstream regulator Petroleum and Natural Gas Regulatory Board (PNGRB) and undertaking fiscal reforms including covering oil and gas under the proposed Goods and Services Tax (GST) framework in order to facilitate development of markets by simplifying and standardizing taxation norms and ensuring similar prices of oil and natural gas across the country.
The panel’s also recommended extending the definition of ‘Mineral oil’ as used in Oilfield Regulation and Development (ORD) Act of 1948 to the Income Tax Act of 1961 and waiving customs duty on import of LNG for all purposes.
The panel was formed by the previous government in 2013. Its final report, in September 2014, follows an initial report of January 2014 and a consultation paper inviting suggestions from stakeholders in August last year.
The petroleum ministry has already raised natural gas prices by 33 per cent to $5.61 a unit, based on an average of global wellhead prices.
According to Kelkar, a competitive market-linked price for natural gas will incentivise higher exploration and production, and make marginal and stranded fields viable. New discoveries of gas in India are likely to be in deep water and ultra deep water basins, implying riskier exploration expenditures. “As gas prices rise to market levels, increased production will lead to direct savings in the import bill, current account deficit and improvement of fiscal health,” the committee said.
- Contract extension up to the economic life of blocks
- Revamp bidding parameters under Nelp
- Allow private sector to develop shale reserves in nominated blocks
- Continue with the production sharing contract regime as opposed to the Rangarajan-proposed revenue sharing contract model
- Make Rs 7,000 crore available to DGH for creation of a national databank on basins
- Delegate quasi-judicial power to DGH on the lines of Sebi
- Exempt upstream firms’ production from mature fields from subsidy sharing
- Offer equity participation to foreign firms in nomination fields
- Ensure absence of retrospective changes to contracts
- Encourage coal gasification & shale gas exploration
- Develop petroleum clusters of oilfield service providers on the east and west coasts
The panel is also in favour of continuing with the existing production sharing contract (PSC) regime in the hydrocarbon sector, as opposed to the Rangarajan-proposed revenue sharing contract (RSC) model for future contracts. And, for making Rs 7,000 crore available to the Director General of Hydrocarbons (DGH) for creation of a national databank on domestic basins, and delegating quasi-judicial power to this entity, on the lines of the capital markets regulator.
“The committee has reservations against accepting the biddable RSC model due to the inherently misaligned risk-return structure, which leads either to lower levels of production due to resultant reduced exploration efforts and lower recovery ratios or to high windfall gains to operators, encouraging contract instability due to political economy factors,” the 10-member panel that held 30 meetings over 18 months has said.
Under the PSC regime, oil companies can recover costs from sales of oil and gas before sharing profit with the government. The Comptroller and Auditor General of India had criticised this approach, arguing it encouraged companies to needlessly increase their capital expenditure. Under the RSC model, companies state upfront the amount of oil or gas they will share with the government from the first day of production.
The committee has also spoken in favour of a long-pending demand of the upstream oil firms – exempting their production from mature fields from subsidy sharing, apart from introducing an Open Acreage Licensing Policy by 2016; offering equity participation to foreign firms in nomination fields; ensuring absence of retrospective changes on contracts, to boost investor sentiment; encouraging coal gasification and shale gas exploration; and developing petroleum clusters of oilfield service providers on the east and west coast.
Another recommendation that would impact business sentiment is extension of the contract tenure up to the end of the economic life of the asset. “This would create incentives for operators to focus on long-term investments such as enhanced oil recovery techniques, rather than short-term gains,” the panel has said. The suggestion assumes significance as Cairn India, petroleum arm of Vedanta Resources, is seeking extension of its contract for the Rajasthan oilfields beyond the current term ending 2019.
The Kelkar panel has also noted that shale gas might account for at least 75 per cent of India’s untapped hydrocarbons. “India should put in place a policy to allow private players to explore shale from nominated blocks,” Kelkar has said. The current policy allows only state sector units to explore shale reserves in onland blocks allotted on a nomination basis.
(Source: Business Standard, February 24, 2015)
INCENTIVES TO BOOST OIL, GAS EXPLORATION
NEW DELHI: Finance minister Arun Jaitley is expected to announce measures to incentivise domestic oil and gas production, in the Union Budget on February 28.
Officials said that by bringing parity between imported and domestic crude oil, the government will send the right policy signals to current and future investors in India’s oil and gas exploration sector.
“The government may do away with the central sales tax (CST) on domestic crude oil in order to incentivise domestic oil and gas exploration and production,” a government official said, seeking anonymity.
After witnessing an exodus of foreign companies on the grounds of restrictive regulations and policy delays, India is once again back on the radar of leading global firms.
“Domestic exploration and production sector would also get a boost when it is assured that it will not be placed at a disadvantage vis-à-vis imports,” said the official source.
According to top petroleum ministry officials, US energy giant Chevron Corp, which is also the world’s third-largest oil company, has shown interest to invest in the country’s oil and gas sector.
French energy company, Total SA, is also keen to spread its wings in India’s energy business that includes fuel retailing and solar power, official sources added.
Oil minister Dharmendra Pradhan had recently met Chevron executives, including its global vice-president Jay R Pryor, and discussed investment opportunities in the sector.
Companies who exited India’s energy space citing regulatory hurdles and policy paralysis include the world’s biggest miner, BHP Billiton, Australia’s Santos.
It is also likely that the finance minister may re-introduce the 5% customs duty on crude oil imports to rake in $3 billion for the state exchequer, sources said.
(Source: Hindustan Times, February 24, 2015)
PSUs WERE CLIENTS OF ‘CONSULTANCIES’
NEW DELHI: Investigations into ‘Leakgate’ have revealed that besides private energy companies, several public sector undertakings (PSUs) were paid subscribers of ‘consulting firms’ now under investigation for illegally procuring sensitive documents from government ministries. Not only that, these PSUs frequently advertised on the websites of the consultancies too.
Industry sources said that several top PSUs, including Coal India Ltd, Power Finance Corporation, ONGC, ONGC Videsh Ltd, Gail India Ltd, NTPC, BHEL, BPCL, HPCL, Power Grid Corportion of India, NHPC, Indian Oil Corporation and Oil India, were clients of the consulting firms being probed and few others yet to be probed, and would have had access to the documents ‘procured’ by them.
Several consultancies under the scanner — including former journalist Santanu Saikia’s Indianpetro and Melbournebased consultant Prayas Jain’s Metis Energy Solutions — earned a substantial part of their revenues from PSUs, said sources. Saikia and Jain are among 13 people arrested in the case.
Investigations have revealed that several energy consultants would illegally procure documents from the ministries of petroleum and natural gas, power, coal and fertilisers regularly. These would then be forwarded to their clients, depending on the nature of the subscription.
In addition to private firms and PSUs, several leading public and private sector banks, merchant and investment bankers, brokerage houses, industry associations and leading global consultancy firms are clients of the energy consultancies being probed in ‘leakgate.’
“Sometimes the subscription would be very basic and the clients could access only documents uploaded on the websites. A higher subscription ensured that the clients could access specific documents. We are examining the contracts that these consulting firms had with their clients to see which companies accessed confidential documents,” an official familiar with the investigation said.
Spokespersons of most energy PSUs refused to comment on record. However, most admitted their subscriptions were specifically to gather intelligence on what the competition had on them. “We have always been concerned about our plans and strategies reaching our private counterparts. (Our) access and subscription to these websites was only for intelligence gathering on what plans of ours are being put in the public domain. We did not have any interest beyond this,” a senior PSU oil company official clarified on condition of anonymity.
(Source: Hindustan Times, February 24, 2015)
CAIRN ENERGY LAYS OFF 40% STAFF FOLLOWING INDIA TAX DISPUTE
LONDON: Scottish oil and gas explorer, Cairn Energy plc has sacked nearly 40 per cent of its employees as it faces capital constraints on not being able to sell $ 1 billion worth of stake, following a tax dispute in India.
Cairn has laid off 100 employees across the board as a cost cutting measure, company sources said.
The company has not been able to sell its 9.8 per cent stake in Cairn India to raise funds for its exploration programme as Income Tax Department has placed restrictions, pending resolution of a tax dispute.
“We didn’t have access to capital and so had to do voluntary redundancy,” a source said, adding “with this we have completed reorganisation of the company.”
Cairn Energy, which was a long-term investor in India between 1994 and 2011, gave the country its largest onland oil discovery in Rajasthan which today accounts for 30 per cent of the domestic production.
In 2006, it transfered Indian assets into a subsidiary, Cairn India Ltd, which was listed on stock exchanges. This was approved by the RBI, FIPB and SEBI.
In 2011, it sold majority stake in Cairn India to Vedanta Group but continued to hold a residual minority interest.
In January last year, Cairn Energy received a notice from the Income Tax Department citing the 2012 retrospective tax legislation and requesting information on the Group’s reorganisation.
The company faces a potential tax demand on an alleged Rs 24,500 crore of capital gains it made when in 2006 it transferred all its India assets to Cairn India.
Sources said Cairn was encouraged by Finance Minister Arun Jaitley’s statement in July while presenting the Budget for 2014-15 that no new tax demand will be raised using the controversial retrospective tax law introduced in 2008.
While the I-T Department has so far not raised a tax demand on Cairn Energy, it has ordered Cairn India not to allow the transfer of UK firm’s residual stake. It also ordered that the shares cannot be pledged or mortgaged.
“Cairn has re-confirmed with its advisers that throughout its history of operating in India the Company has been fully compliant with and paid applicable taxes under the legislation in force at the time,” the source said.
The Income Tax Department had, in a January 22 order, held that the Edinburgh-based firm made capital gains of Rs 24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in places like Jersey, a tax-haven, to the newly incorporated Cairn India in 2006.
It, according to the I-T Department, received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.
(Source: The Economic Times, February 24, 2015)
RELIANCE GROUP SAYS ITS FIRM COOPERATING WITH AUTHORITIES
MUMBAI: Amid a major crackdown on an alleged “corporate espionage” syndicate, business conglomerate Reliance Group today said it is “committed to propriety in all its business dealings” and group firm Reliance Power is fully cooperating with the authorities.
In separate regulatory filings with stock exchanges, all listed companies of Anil Ambani-led Group also said “no search or raid has been conducted by police authorities at any office of the Reliance Group anywhere in India”.
The filings made by Reliance Capital, Reliance Infrastructure, Reliance Communications and Reliance Power stated that the Group clarifies its position in the “interest of millions of its investors”, following “misleading reports in a section of the media”
“The work station of only one specific Reliance Power employee was searched, and no incriminating material of any kind was found. We are not aware of the circumstances leading to the arrest of that employee, and Reliance Power is fully cooperating with the authorities.
“We are committed to propriety in all our business dealings, and do not support unlawful activities of any nature.”
The Reliance Group employee is among those who have been arrested by Delhi Police in connection with an “corporate espionage” syndicate that was allegedly found to be stealing “secret” official documents from Petroleum and other ministries for sale to corporates and lobbyists.
Meanwhile, Reliance Power shares were trading 1.66 per cent down at Rs 62.30 per scrip, while those of Reliance Capital fell 0.69 per cent to Rs 454.30 apiece during early trade on the BSE.
Besides, Reliance Infrastructure shares fell 1.05 per cent at Rs 461.20 per scrip, while those of Reliance Communications declined 1.11 per cent to Rs 71.20 apiece in early trade.
(Source: The Economic Times, February 24, 2015)
TWO KILLED IN BLAST AT GULF OIL UNIT’S STORE HOUSE
Hyderabad: Two people have died and at least nine injured in a blast at a detonator store house of IDL Chemicals, part of the Gulf Oil Corporation Ltd.
The blast is stated to have occurred at around 4.45 p.m. resulting in a big flare up and injuries to members at the store house.
Ambulances were rushed to the spot to shift the injured, most of them with burns, and fire tenders were deployed.
An official of the company confirmed the development stating that it is unfortunate that such an incident occurred today. “We were taken aback by the news of the blast. The cause is being investigated. We would not be able to comment now on why and how the blast occurred,” he said.
While confirming the death of two people, a person, who is monitoring the situation, said that nine other injured have varying levels of burns, some minor. All are undergoing treatment, he said.
For Gulf Oil Corporation, the detonator business is one of the arms which support mining and other sector requirements. The explosives unit faced similar instances of blast in April 2013 and November 2003.
(Source: Business Line February 24, 2015)
OIL FALLS 2 PER CENT ON GLUT WORRIES; HEATING OIL UP ON TIGHT SUPPLY
NEW YORK/LONDON/SINGAPORE: Crude oil futures fell more than 2 percent on Monday as investors worried about oversupply and a strong dollar, but heating oil futures jumped 5 percent due to operational problems at major U.S. refineries.
Crude was down for almost the whole trading session, rising briefly after the Financial Times quoted Nigerian Oil Minister Diezani Alison-Madueke as saying the country might call for an OPEC extraordinary meeting in the next six weeks or so if prices fell further.
The market has slid since Friday’s data showing a slowdown in the weekly decline in the number of rigs drilling for oil in the United States. The data raised worries that U.S. crude inventories, already at record highs, could swell further.
The largest U.S. refinery strike in 35 years has also been a negative for crude prices.
Heating oil futures rallied for a second straight day, reaching above $2.24 a gallon, the highest in nearly three months, as some of the biggest U.S. East Coast refineries struggled to restore operations after severe cold weather triggered outages. Sub-zero temperatures were expected to sweep through the region late on Monday, raising concerns about adequate heating supplies.
“It’s a worry of high supplies with crude and tight supplies with heating oil,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.
Benchmark Brent crude settled down $1.32 at $58.90 a barrel
Brent briefly rose, hitting a session high of $60.67, after the comments by the Nigerian minister, Alison-Madueke, who is also OPEC’s president. Analysts said the gambit will likely fail without Saudi Arabia’s support.
U.S. crude futures, also known as West Texas Intermediate, or WTI, settled down $1.36, or 2.7 percent, at $49.81.
While high supply was pressuring crude prices, the market also was seeing quick “buying on dips,” evidence that bulls were in more control than a few months ago, traders said. After losses of between 9 and 18 percent each month from October to December, Brent consolidated in January and is up about 11 percent month-to-date.
“There is the notion that a bottom has been set at $55 for Brent and $45 for WTI, and there are enough buyers out there each time the market tests those levels,” said John Kilduff, partner at New York energy hedge fund Again Capital.
(This version of the story corrects settlement price of Brent in paragraph 7 to down $1.32 at $58.90 a barrel, instead of down $1.32 at $58.82 a barrel) – Reuters
(Source: The Financial Express, February 24, 2015)
CRUDE OIL ROLLERCOASTER BAFFLES INDIAN OIL SECTOR
MUMBAI: Making sense of the price movements of global crude oil is mind-boggling as a matter of course. In fact, several theories abound on what is driving prices in a certain direction.
But, the last six months have been particularly exasperating if you’re in the business of tracking crude and estimates, for the future vary from crude reaching all-time lows or returning to record highs, depending on whom you speak with.
Brent crude, the global spot price benchmark, fell from $115 a barrel last June to $47 this January.
While this was good news for fuel consumers, no one really knows how long the party will last.
And if you’re in the business of prospecting for oil, there isn’t any party at all.
Fereidun Fesharaki, Chairman of global energy consultancy FACTS Global Energy, at a conference conducted by Edelwiess in Mumbai last week, described the current developments in world oil markets as a permanent “structural shift”, with the dawn of American shale nudging Saudi Arabia off its throne as the oil market’s “swing player”.
Fesharaki believes the oil market will remain in over-supply until Q4FY15 and thereon forecasts oil prices to remain capped at $70 a barrel over the next few years, as any increase from here will encourage non-conventional players (like American shale oil producers, Canadian oil sands) to return to production.
BP, one of the world’s biggest oil and gas companies, in its recently published Energy Outlook for 2035 doesn’t take a call on future prices but expects the growth in tight (shale) oil to slow while West Asian production gains ground once more.
An official with an Indian oil marketing company said, “It’s impossible to take a call on where crude prices are headed. Since this is a commodity driven by political and not economic motivations, there is no telling what will happen. In fact, we won’t be surprised if crude falls to $40.”
Brent prices have been inching up again through February; it now stands at over $60 a barrel. “But on the other hand,” the oil marketing official said, “It’s still too early to see if the spurt in prices can be sustained.”
Wild volatility in prices wreaks havoc with an oil company’s financials.
For the December quarter, of the three state-owned oil marketing companies, IOC and BPCL reported total inventory losses of over Rs 13,000 crore, while HPCL didn’t reveal its equivalent figure.
“The problem for us, companies, is to constantly plan inventory management during periods of high price volatility. We prefer a stable price band of $76-80 a barrel.
“This would help all associates involved, starting with explorers like ONGC to fuel marketers.”
Refiners were hit particularly badly last quarter because of the sharp fall in crude prices. For an explorer and refiner like state-owned ONGC, lower realisations as well as subsidy payouts (it reimburses oil marketers for selling kerosene and LPG below market prices) cut its third quarter profits by half from the year-ago period.
How the volatility in global crude plays into your fuel bills at home is equally difficult to call.
While petrol and diesel prices have been cut marginally in tandem with Brent crude (see chart), energy consultant Fesharaki said that the “benefits have not been completely passed on to consumers, as the Government has either cut subsidies or hiked taxes, making local oil demand not responsive to falling oil prices.”
(Source: Business Line February 24, 2015)