Oil & Gas Stepping on the Gas

The complete deregulation of diesel prices and the announcement of the new gas pricing formula are bound to give a fillip to the oil & gas sector in the country.

Finally, the oil & gas sector has been visited by the ´reforms´ hand of the Modi government. The Centre´s task, as far as the diesel deregulation issue is concerned, has been considerably helped because of the falling prices of global crude prices. And the scenario looks bright for huge fuel importing countries like India, as analysts are now predicting that crude prices will continue to trend southwards in the immediate future. A recent Reuters report says that oil prices are likely to be mired near their lowest levels in more than four years in 2015. Brent has already hit a four-year low of $82.60, and the supply glut is expected to continue well into the next calendar year. Poor global demand is expected to further exacerbate the situation as global economic powerhouse and huge fuel consumer China will see its growth slow down over the coming months.

Further, industry observers are optimistic over the growth prospects for the domestic oil & gas industry. Says John Westwood, Group Chairman of Douglas-Westwood (see interview): ¨Indian oil and gas production is set for growth, both onshore and offshore, in our forecast period (2014-2020). The combined (oil & gas) onshore production will see 11 per cent growth by 2020, supported by output from Cairn India´s acreage in Rajasthan. Combined offshore production will rise by 21 per cent by the end of the decade, with large gains in deepwater gas projects operated by Reliance Industries, BP and ONGC.¨

According to ratings agency Fitch, more private firms might enter the diesel market over the medium term, leading to greater competition and the deepening and strengthening of the market. The agency says: ¨The expected direct impact of both the diesel reform and natural gas price hike on Fitch´s headline fiscal forecasts is limited; but the fiscal balances will be more robust to future oil shocks, since both diesel and petrol prices are now determined by the market. Furthermore, implementation of these politically sensitive reforms demonstrates that the government continues to roll out structural reforms gradually, and suggests that more far-reaching structural reforms may be in the pipeline.¨

The Indian government has also been actively scouting the globe for securing energy assets. India and Vietnam have signed a number of agreements for collaborating in existing oil blocks and also for offshore exploratory ventures. India and Mozambique have signed a Memorandum of Understanding for upstream and downstream collaboration and technology-sharing. Mozambique is expected to hold around 200 trillion cubic feet of gas reserves. Big government entities like Indian Oil Corporation are investing in shale gas and LNG projects in North America. IOC will invest $4 billion in British Columbia, Canada, for securing LNG supplies.

Moody´s says in its latest research note: ¨Diesel price deregulation is credit positive for the sovereign because it will lower government spending on subsidies to bridge the gap between global market prices and domestic regulated prices. Additionally, deregulation proves to investors that the government remains committed to fiscal consolidation and structural reform. Because the government introduced the measure amid falling global oil prices, it will have a limited inflationary effect.¨ More importantly, the ratings agency says that diesel deregulation, which was a difficult political decision to make, ¨will also compel domestic demand to adjust more quickly to price signals, preventing the kind of balance-of-payments pressures that have built up when domestic consumption was sheltered from the effect of global oil price increases.¨

It is not just price deregulation that the government has initiated; its ´Make in India´ campaign will also touch upon the holistic development of this sector. Reports indicate that the ¨Make in India¨ campaign for the sector would focus on domestic manufacturing equipment used in the petroleum & natural gas sector. According to the government, in order to roll out the ¨Make in India¨ campaign in the oil & gas industry for domestic manufacturing for equipment used in the petroleum and natural gas sector, the Ministry of Petroleum and Natural Gas has decided with the approval of the Minister of State Dharmendra Pradhan to formulate a time-bound action plan to successfully implement the rollout in consultation with different stakeholders. To monitor progress of this initiative and to ensure that the desired outcome is achieved as per the timelines, a Steering Committee has been constituted in the Ministry under the chairmanship of Rajive Kumar, Additional Secretary. The Committee has been mandated to devise a strategy and develop a roadmap for successful implementation of ¨Make in India¨ campaign in the oil and gas industry. On the gas front, the oil ministry expects gas production to rise by two-thirds over five years. Domestic gas production is set to rise from 100 million standard cubic metres per day (mscmd) in the current financial year to 163 mscmd, over the next five years through March 2019. ONGC is expected to contribute around 35 bcm of gas production by 2019.

The government finally decided to implement a hike for domestically produced gas, after having put the issue on the back-burner for a few months. This was a tightrope decision by the government: too low a price could have put off gas majors looking at investing in gas exploration, and a figure on the higher side would have stoked inflation and also made gas-fired power plants struggle for viability. The Centre finally fixed the price of domestically produced natural gas at $5.61 a unit, up from $4.2 a unit. This price is expected to be revised on a half-yearly basis. Finance Minister Arun Jaitley said after the hike that the Cabinet had approved the reworked formula keeping in consideration that there is sufficient incentive for drilling and exploration, while not making it prohibitive for consumers. Major players in the oil & gas industry who are eyeing the potential that the country offers obviously welcomed the move to hike gas rates. BP, which had previously written off $770 million from its investment in the KG-D6 block of Reliance Industries, citing ¨uncertainty¨ over benefits flowing from the government´s gas pricing policy, has said that the Centre´s move was a positive step towards creating an economic landscape that helps in development of gas resources. ¨This increases the gas price applicable for existing production and is a positive first step towards creating the more competitive economic landscape required to encourage the development of India´s gas resources,¨ BP Chief Financial Officer Brian Gilvary said at a recent investor call.

¨With the assurance of the revised prices, upstream producers can evaluate the commercial feasibility of exploratory fields. Additionally, higher gas prices will encourage upstream producers to invest further in exploration and production in India, particularly for offshore gas fields that are not commercially viable at current prices. The government has also indicated that there will be a premium on the gas prices at complex offshore fields, but has not provided further details,¨ says Moody´s in a research note.

-Devarajan Mahadevan