New shale gas policy another blunder?

Thu, 19 Sep Pre-Open

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Being in the public sector or private sector can be a game changer for the companies in the domestic oil and gas sector. The implications are diverse. State run oil and gas exploration and production (E&P) firms like Oil and Natural Gas Corporation (ONGC) end up losing much of their earnings on account of the fuel subsidies offered to domestic oil marketing companies for under recoveries in a regulated fuel market. However, this time, the Government ownership is likely to give the PSU oil companies a significant lead over their private sector peers.

As per an article in Business Standard, in the initial stages, the Government is planning to give only the state run companies the right to explore shale gas

Hence, initially, the private companies are likely to be kept at bay as far as opoortunity in the shale gas segment is concerned. The move has been inspired from the studies that suggest that a minimum of 176 nomination blocks are likely to have shale gas deposits. It is important to note here that the nomination blocks were allotted to government owned companies before competitive bids were allowed in the sector for oil and gas exploration.

As per the daily, an important aspect of shale gas block auction this time will be royalty and production linked payments. This is different from existing mechanism wherein the operator first recovers the costs of exploration and then the profit is shared with the Government. This mechanism has faced criticism from the Comptroller and Auditor General (CAG) as it encourages gold plating the costs, corruption, delay in production, complicated accounting and reduced profit share for the government. The new mechanism is likely to do away with the cost recovery system. As per the new mechanism, the operators will have to pay royalty to the Government and make payments in line with the amount of gas produced from the nomination blocks.

While doing away with cost recovery mechanism makes sense, we believe that excluding the Private sector in the initial stages will be restrictive for the shale gas prospects in the country. The Private sector E&P companies along with partnerships with the foreign companies could have brought in the much needed capital and expertise in the segment. Ideally, the opportunity to explore must be open to all and offered to the best. Further, this should also incorporate appropriate disciplinary action in case the selected operator is not able to deliver as promised within the set timelines. The domestic oil and gas segment has already suffered enough on account of distorted pricing policies.

Now that we are venturing into the shale gas segment which could be the game changer for the energy sector, it is important that we get the first steps right.