Govt provides greater pricing power to domestic oil producers

The Cabinet Committee on Economic Affairs (CCEA) on Wednesday decided to lift the residual controls on domestic oil producers’ business, by allowing them to sell their produce to anyone in the domestic market at prices not determined solely by any rigid benchmark, but on the basis of freer negotiations with the buyers.

The move would increase pricing powers of state-run ONGC, Oil India and private player Cairn India and help them in market-determined price discovery.

ONGC and OIL used to bear a part of the government’s oil subsidy for long years. These firms used to sell crude at heavily discounted prices – 50% and more – to state-run OMCs – IOC, BPCL and HPCL. The practice was done away with in the first quarter of FY16, but the policy of allocating crude to “the Centre, its nominees and government companies” continued. This condition in the production sharing contracts (PSCs) will be waived off, effective October 1. Of course, the state-run oil producers would continue to be barred from exporting their produce.

The CCEA’s decision could result in higher realisation for the oil producers and have positive spin-offs like higher revenues for the government from the cess and royalty on crude. More profits for oil producers would potentially entourage them to step up production and invest more in exploration and drilling, a salutary outcome given the stagnant domestic production of hydrocarbons and the ever-rising energy import bill.

Currently, the government determines how oil produced in the country is allocated among various state-run refiners and every six months the quantum to be available to each refinery is re-allocated. In the process, the producers’ negotiating powers are undermined.

State-run oil marketing companies could, however, feel the pinch as they will have to deal with crude producers armed with higher pricing powers.

Currently, crude attracts cess at 20%, while royalty is levied at 20% for onshore and 10% for offshore production.

Information and broadcasting minister Anurag Thakur said: “Whatever they (oil producers) are going to explore and produce will be sold only in the domestic market, but they will have the freedom to not only sell it to the government companies, but also to any private companies. This will encourage investment in the upstream oil & gas sector, boost production of oil and gas and promote the ease of doing business.”

He noted that in 2018-19, Indian refiners could refine only 71% of the crude allocation by the upstream companies and this went further down to 59% in 2019-20. “It will cut down oil imports in the longer run. If the whole of crude produced in India is not refined locally (by state-run OMCs), it will be available to other refiners,” Thakur added.

An ONGC official told FE: “Considering that 85% of the country’s crude requirement is imported, deregulation of crude sales was long overdue. It really makes sense for any exploration and production business.”

Subhash Kumar, former direct-finance at ONGC, told FE that the government’s move amounted to removing an irritant in state-run oil producers’ business. “Now, on the basis of quality, the producers could fetch premium or sell at discount,” he said.

However, it is not clear from the CCEA statement if the nominated blocks that were awarded prior to the New Exploration and Licensing Policy (NELP) will also have the freedom to sell in the open market. For ONGC and Oil India, over 90% of their crude oil comes from nominated fields in Mumbai offshore and Assam, and are not based on production-sharing contracts. ONGC holds a 30% stake in Cairn India fields which is close to 10% of its total production.

DK Sarraf, former ONGC chairman, told FE: “In the current regime, a refinery has to procure crude even if it doesn’t have the ability to process it efficiently. Now, the crude will go to the right buyer at the right price. The decision will increase the realisation for the sellers and the refiners will also be willing to pay the right price for right type of crude.”

Currently, the price at which ONGC-OlL sells to state-run OMCs are mostly decided at a discount to the Brent crude price which is used as a benchmark, with little variance attached to quality of crude.

Anil Agarwal, chairman, Vedanta Group, said: “The decision will attract many national and international companies to do exploration and production in India and encourage international investments in the sector. At Vedanta Cairn Oil & Gas, we are committed to making $4-billion investment and contribute to 50% of India’s domestic hydrocarbon output.”

As of March 31, ONGC’s crude oil production stood at 19.5 million tonne, which it plans to take to 19.88 million tonne by the end of FY23. The output is further expected to rise to 21.6 million tonne in FY24 and to 21.7 million tonne in FY25.

During the regime when upstream companies used to bear part of the oil subsidies, these were treated as off-budget liabilities of the governments. The UPA government had issued oil bonds worth a total of Rs 1.44 trillion between 2005 and 2012, a practice that has since stopped.

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