North Block wants a finger in the gas pricing pie-I: Prescribes more homework for petroleum ministry August 27: Now that a committee is looking into the pricing of gas, every one seems to want a finger in the pie and the finance ministry is no exception. 8Former Prime Minister P. Chidambaram played an important role in stymieing the original proposal for a price hike by inserting the caveat the the price increase should not be given for the shortfall quantity of gas in the D-6 block. 8The finance ministry under Arun Jaitley too is now taking an active interest and in a recent communication with the petroleum ministry, finance secretary Ratan P. Watal has sought the following clarifications on the subject: 8The basic objectives of the extant policy on natural gas pricing may be delineated. 8It should be clarified if the Rangarajan Committee Report would be applicable to the existing PSCs which are codified contracts and whether it would violate any of the existing contractual obligations. 8The petroleum ministry must indicate the impact of a revision in gas price on the power and fertilizer sectors. 8The present status of the litigation / arbitration that are pending and their impact on the matter under consideration of the committee (looking into the gas price hike) be clarified. The consequences of the Supreme Court Judgement in the RIL vs RNRL case should also be brought out. 8The views of the petroleum ministry on the need to re-examine the constitution of the Management Committee (MC) and for strengthening of the Directorate General of Hydrocarbon (DGH) should also be given. 8The Rangarajan Committee also recommended for moving to a revenue sharing arrangement with gas producers. The petroleum ministry must also state their views on the status of the proposal to move away from a PSC regime to a revenue sharing regime. 8The views of the petroleum ministry on the recommendations of the Ashok Chawla Committee on Allocation of Natural Resources (CANR) on gas must also be stated. Details North Block wants a finger in the gas pricing pie-I: Petroleum ministry told to do its own pricing matrix August 27: The finance ministry is clearly trying to find its own way of arriving at the optimal gas price for the country. 8The finance secretary has now asked the petroleum ministry to work out a different pricing scenarios based on the different methods of pricing being followed across the world and what would result if any of those are adopted for the Indian conditions. 8Then again, North Block wants another exercise on whether gas prices can be benchmarked to different energy sources, including oil, hydro power, coal, LPG and fuel oil. 8The Rangarajan Committees formula calls for benchmarking the price of gas to the netback price of gas across the world. 8But the finance ministry now wants a whole new exercise that will look at all kinds of options. 8The petroleum ministry constituted committee to look into gas pricing is also expected to come up with its formula. 8So, two parallel exercises will now be undertaken. 8It will then remain a moot point which exercise will finally be adopted. Click on Details Details Kelkar Committee comes out with a fresh paper-I: Pitches again for market determined price for gas August 27: The Kelkar Committee, burnt by allegations of plagiarism in its earlier report on a roadmap for enhancing domestic production and sustainable reduction in import dependency by 2030, has prepared a fresh draft consultation paper for moving towards a new E&P regime and a roadmap for market-determined pricing of natural gas. 8The Committee, in the consultation paper, has argued that the time has come for India to move to a market determined price for gas. The Committee is of the view that natural gas be recognized as a finite and exhaustible resource that is required to be looked at from the view of inter-generational equity. 8A gas molecule consumed by the current generation is, in effect, denied to the future generation. In other words, the present generation is essentially borrowing these resources from their children and grandchildren, and equity requires that the future generation is fairly compensated. 8The question then arises, `What is the `fair and right price` or what price should grandparents pay to their grandchildren for such a transaction? the Committee has asked. At the very minimum, the resource price cannot be less than the maximum opportunity value of the resource. Hence, the fair price can only be the best price a gas molecule can command either in the domestic or international market place, that is, the price that is market-determined in an environment where exchange is conducted in a transparent manner on an arm`s length basis, the Committee has argued. 8A competitive price for natural gas will make viable a significant number of marginal and stranded fields given the higher incentive for domestic E&P activities. Furthermore, new discoveries in frontier onland areas, deepwater and ultra-deepwater basins, which entail higher and riskier E&P expenditures, can only be developed if the country moves towards a transparent market-determined price for gas. Click here to access a copy of the latest Kelkar report Details Kelkar Committee comes out with a fresh paper-II Cost plus pricing model for gas has several disadvantages August 27: The Kelkar Committee is also against the implementation of a cost-plus pricing model for gas that is now being mooted as a panacea for the pricing problems faced by the gas industry. 8In a cost-plus pricing model, gas prices are fixed such that they provide a pre-determined rate of return to investors. The cost-plus model aims at capping the profits to producers thereby creating a perception of fair price for consumers. 8The Committee has pointed out that there are several major disadvantages of the cost-plus model. First of all, there is no incentive for operators to achieve cost efficiency or to minimize costs. On the contrary, with an assured post-tax return, operators, under such a model, will be incentivised to gold-plate so that they can achieve higher absolute returns on a cost-plus basis. 8Then under such a model there will be the possibility of several disputes cropping up between the government and the operators regarding cost estimates. As different fields have different technical requirements and hence very different operating costs and capital expenditures, it will lead to difficulties in managing contracts. 8Then again, there will be room for disagreements on the set rate of return for investors particularly since E&P is a risky business and determining appropriate returns commensurate to the risk involved will be a subjective matter. As different fields have different risk profiles depending on the geology and stage of appraisal they will require different rates of return under a cost-plus pricing model leading to greater complexities. 8Lastly, the possibility of complex issues cropping up regarding accounting for expenditure on unsuccessful exploration efforts also cannot be ruled out, the Committee has argued. Click here for more information Details Kelkar Committee comes out with a fresh paper-III: Suggests scrapping of allocation priority, moots supply and demand side reforms for gas August 27: The Kelkar Committee has suggested that the governments policy for allocation of gas to priority sectors should go and instead supply and demand side reforms should be put in place. 8The Committee has pointed out that preferential allocation of gas under the current gas utilization policy restricts development of a gas market by making it difficult to identify the true gas demand. The gas allocation policy contradicts the right of producers to sell gas, based on commercial terms in accordance with the New Exploration Licensing Policy (NELP). 8It is because of this that the producers should be allowed the freedom to sell gas to any willing buyer at an arms length-determined price as laid down in NELP. It is often argued that a high price for natural gas will be economically unviable or unsustainable for some priority sectors like fertilizers and power but supplying natural gas at artificially low prices to all consumers, including those who can afford to pay a higher price is also unfair. 8What should be done is that the gas should be sold at a higher price to support the priority sectors through relevant, transparent and targeted subsidies. 8It is also important to note that higher prices of gas will also result in additional revenues to the government in the form of governments take through increased E&P activity in the country. Increasing domestic production will also contribute directly to savings in the import bill. These additional sources of revenues will help offset any additional subsidy burden. The subsidies can be provided in the form of producer subsidies to intermediate producers such as fertilizer and power companies or directly to end consumers. Click here for more information Details Kelkar Committee comes out with a fresh paper-IV: Says Revenue Sharing Model will not work, moots PSC regime with self certification August 27: The Kelkar Committee has opined that the Revenue Sharing Model, in the Indian context, will not work and in its place it has mooted an alternative PSC regime with self certification. 8The Committee is of the view that the Production Sharing Contract (PSC) model with its inherent cost recovery provides greater assurance to investors and offers a more balanced risk-reward equation as compared to other models such as the Revenue Share Contract (RSC). 8Various analyses have clearly demonstrated that the PSC regime is likely to achieve a larger number of NPV positive fields as compared to the RSC regime, for similar levels of government take. Given India`s large share of maturing fields, the PSC model with its feature of cost recovery is better suited to incentivise investment in new technologies to boost production, the Committee has claimed. 8However, it has been observed that in recent years, the administration of PSCs in India has lead to several disputes cropping up relating to cost recovery. These issues lead to significant delays and consequent financial losses to operators. 8To address these concerns, the Committee has mooted an alternative PSC regime with self certification. As per this methodology, the PSC will be linked to an Investment Multiple (IM) model similar to the present PSC regime where the basic elements of the prevalent PSC model -- a biddable cost recovery cap (upto 100%) and biddable share of profit petroleum, based on the Pre-Tax Investment Multiple (PTIM) -- will be kept intact. 8However, variations in the administration process have been introduced in the proposed PSC regime to address operational constraints. It has been suggested that the revenue department should be given the requisite manpower and capabilities to ensure that companies do not misreport their numbers. The initiatives proposed by the Tax Administration Reform Commission (TARC) should be incorporated to simplify tax administration norms, thereby improving the efficiency and effectiveness of the tax collection process, the Committee has said. 8The Management Committee (MC) should not be made responsible for any financial audits or pre-approval and assessment of expenditures. Cost recovery should be executed on the basis of self-certification by the Operating Committee (OC), and the profit petroleum, along with the associated costs submitted for calculation of the share, should be audited by the revenue agencies as per standard procedures for collection of corporate income taxes. 8Self certification of expenditures is a standard best practice all over the world, particularly in dealing with corporate liabilities. The revenue authorities would conduct audits of such corporate liabilities as per standard procedures to ensure that there is no misrepresentation of facts or tax evasion, the Committee claims. 8Assessment of profit petroleum by revenue authorities would also bring the E&P companies under the scope of government financial audits which in turn will subject them to the same rigorous level of scrutiny and inspection that is regularly applied to the assessment of corporate taxes. Click here for more information Details Kelkar Committee comes out with a fresh paper-V: Suggests alternative PSC model with super normal tax August 27: Besides suggesting an alternative PSC regime with self certification, the Kelkar Committee has also suggested yet another PSC model with a supernormal profit tax. 8Under this model, the government`s take will comprise only of royalty payments and corporate income taxes until supernormal profits or windfall gains are triggered. This will make E&P investments more attractive and at the same time reduce the administrative burden associated with the present Investment Multiple (IM) based PSC model. 8The Committee has pointed out that global examples indicate that in the case of windfall gains to operators, governments are under pressure to re-negotiate or unilaterally change contracts to gain a larger share. This leads to uncertainty for investors by creating an unstable regime. To overcome this, the model proposes the imposition of a biddable supernormal profit tax in the case of unforeseen and significant gains. Such a levy would be triggered when a pre-determined threshold of investor return has been crossed. This would afford predictability and stability of the contract, while, at the same time, ensure a fair share of profits to the government. 8The supernormal profit tax would be triggered annually in cases where the overall Return on Average Capital Employed (RoACE) to the investor exceeds a pre-determined threshold. Upon reaching the threshold, the operator would be required to pay the government a share of the incremental profits that are over and above the threshold. This will be in addition to the regular corporate income taxes and royalties paid by the operator. 8The assessment of the super normal profit tax should be left to the revenue agencies. 8However, implementing the model will have its own problems. Initial challenges may arise because of transition to the new regime from the existing model, which has been well tested over many years. The government`s take may also be lower in the initial years as it is expected that the RoACE threshold will be breached only after few years of operation. Then again, for certain fields, the threshold RoACE limit may never be reached, leading to lower government take. Click here for more information Details Kelkar Committee comes out with a fresh paper-VI: Calls for modification in BEC for auction of blocks August 27: In order to encourage operators with advanced technological capabilities to invest in the development of Indian basins, the Kelkar Committee has suggestedmodifications in the bid evaluation criteria (BEC) for auction of exploration blocks. The Committee has made the following points: 8Advanced technical expertise, such as, geology-specific experience or marginal and mature field technologies are very critical for optimal exploitation of E&P blocks. In countries such as Norway and the UK, technical evaluation is used as a criterion for awarding all petroleum licenses to ensure that the operator with the right technical capability is awarded the rights for exploration. 8As per the bidding criteria for NELP-IX blocks, there was no technical evaluation for onland and shallow water blocks. However, for deepwater blocks, the bids were evaluated based on technical criteria, along with the proposed Minimum Work Programme (MWP) and commercial terms. While the MWP and the technical criteria carried a 25% weightage each, the commercial terms carried a weightage of 50% under NELP-IX. As per the alternative methodology proposed by the Kelkar Committee, it has been has suggested that the weightage of the technical criterion must be increased to at least 50% for deepwater and ultra-deepwater blocks, while onshore and shallow water blocks may be awarded a 25% weightage. 8Then again, a higher weightage should be allotted to bids submitted as a consortium or Joint Venture (JV) with Indian companies, since this will encourage knowledge transfer and foster indigenous capability building. 8Lastly, some additional technical parameters, such as safety and environmental records as well as geological expertise, should be included in the bidding parameters. Click here for more information Details Kelkar Committee comes out with a fresh paper-VII: Ministry should not be a part of Management Committee August 27: Some other suggestions made by the Kelkar Committee are: 8Ministry should not be a part of the Management Committee: Under the present PSC regime, an MC is formed, consisting of representatives from the ministry, the DGH and the operator. To reduce the government`s involvement in day-to-day operational decision-making, the Kelkar Committee has recommended that the ministry should not directly be a part of the Management Committee. The DGH, in its capacity as the ministry`s technical arm, should be given the responsibility of carrying out the fiduciary and prudential oversight of the resources on behalf of the ministry. 8MoM of OC should be maintained meticulously: The Operating Committee (OC) is equivalent to the Board of Directors of a company. Hence, minutes of the meetings of the OC should be maintained meticulously and shared with the Management Committee (MC) to enable greater transparency and better communication. 8Arbitration should be allowed under UNCITRAL rules: The Committee has suggested that to increase investor confidence in the dispute resolution mechanism, the contract should allow for arbitration under international or United Nations Commission on International Trade Law (UNCITRAL) rules. Efforts should be made to adhere to strict timelines and resolve disputes in a timely manner to ensure that there are no delays in operating fields. 8Bidding companies should be listed on an Indian stock exchange: The bidding entity should be a company that is listed on an Indian stock exchange. In case of a joint venture, the company holding majority of shares should be listed on the Indian stock exchange. And if neither of these conditions are met, then a Special Purpose Vehicle (SPV) should be created after allocation of the block, especially in the case of large investments, and this SPV should be listed on an Indian exchange within a specified timeframe. The listing can be done after the Declaration of Commerciality (DOC) is established. If required, the current Securities Exchange Board of India (SEBI) norms should be modified to facilitate the public listing process. Click here for more information Details Kelkar Committee comes out with a fresh paper-VIII: Other measures suggested August 27: The following initiatives have been suggested to streamline the contract extension process for both new and existing contracts: 8Well defined contract extension process and criteria: The current PSC does not explicitly lay out the policy or procedure for extension of contracts beyond the fixed initial tenure. This leads to uncertainty and deters investment decisions by operators during critical initiatives taken up to boost production. The requirements for contract extension, including timelines, documentation required, evaluation criteria and the approval processes, must be laid out clearly so that the operators can plan their investments in advance. 8Contract extension upto the end of asset`s economic life: Different countries follow different extension models suited to their respective conditions, and range from extensions granted for a fixed time period to those granted upto the end of the economic life of the asset. India should explore a model that allows for contract extension up to the end of the economic life of the asset so that incentives can be created for operators to focus on long-term investments plans rather than going for short-term gains. 8Cancellation of license if no production takes place: The contract should also allow for cancellation of the production license if no production takes place for five consecutive years. 8Conversion of nomination blocks to PSC contracts: To protect government`s take and to incentivise the operators -- who have been awarded blocks on a nomination basis -- to invest in incremental production through modern technologies, the nominated PSCs should be converted to regular PSCs with equivalent fiscal terms. Click here for more information Details Subdidy control-I: Petroleum ministry proposes shifting of dole to exchequer but will North Block agree? August 27: In what`s going to be the first major policy initiative of the new government, the petroleum ministry is planning a complete revamp of the under-recovery sharing mechanism. 8The ministry is planning to take advantage of lower under recoveries on account of the possible deregulation of diesel prices to provide more ground for maneuver. --It plans to reduce the under-recovery burden on OIL and ONGC --It has also proposed payment of royalty to states by ONGC and OIL on crude output at pre-discount crude prices 8The burden of OIL and ONGC is sought to be cut by asking North Block to plough in around Rs 10,111 crore in OID Cess collected by the government on crude oil produced from nominated blocks of the two companies. This will cut the burden of upstream companies to Rs 39,2000 while the share of the government will be at Rs 59,422 crore. This will be significant reduction as the share of the two oil companies in 2013-14 was Rs 67,021 crore. The net realization of ONGC and OIL will go up from $32/bbl to $47/bbl. 8The ministry believes that this will provide the two companies with enough legroom to conduct more E&P work. The ministry has argued that the country may lose 70 MMT of crude output from ageing oil fields if the two companies do not invest in them and this will raise the import bill by 3.38 lakh crore. If this crude is produced indigenously, savings will be to the tune of $2.38 lakh crore. New exploration efforts are expected to yield around 13 MMT of crude, worth Rs 61,000 crore. 8As for GAIL, the subsidy burden has gone down on account of the substantial increase in cost of production of LPG and SKO on account of non availability of APM gas. The share of the gas major will now depend upon the profits made by GAIL on sale of LPG to OMCs. 8The petroleum ministry proposal has to be agreed upon by the finance ministry, who has to dole out the extra subsidy from its budget. Getting North Block`s permission may not be all that easy or simple. Click on Details for more information. Details Subdidy control-II: No change in LPG and SKO prices August 27: The petroleum ministry expects more competition in the retail market for petrol and diesel within the next few months when diesel prices are set to be deregulated. 8A proposal will be taken to the cabinet later when the diesel price is free of under recoveries for deregulation prices, as was done for petrol. 8Diesel prices will continue to be raised by Rs 0.50 per litre every month. Full decontrol is expected within the next four to five months. 8SKO and LPG are the holy cows that the new government does not want to meddle with. 8Hopes are pinned on the direct subsidy regime to ease the under recovery burden 8The existing priing mechanism for petroleum products will continue, with Trade Parity Price for diesel and Import Parity Price for LPG and SKO. Click on Details for more Details Government share of under recoveries: It all boils down to a deal at the end August 27: The fact that there is no real planning behind the doling out of government subsidy for under-recoveries was evident from the manner in which the finance ministry sanctioned a total of Rs 11,068 crore as the governments share of under recoveries of public sector oil marketing companies on the sale of sensitive petroleum products for Q-1, 2014-15. 8The governments share was calculated at Rs 13,114 out of a total under recovery for the quarter of Rs 28,690 crore. 8North Block however said that it could give only Rs 10,000 crore. 8This prompted the a Petroleum Ministry Joint Secretary to get in touch with his counterpart in North Block. What followed was some intense haggling. The finance ministry was told that the Q-1 results of the OMCs were to be announced in the next couple of days and a Rs 10,000 crore dole will ensure that some of them, particularly, HPCL, will have to post losses. 8Eventually, the figure was settled at Rs 11,068 crore. 8There is no inherent logic why an amount of Rs 11,068 crore instead of Rs 11,000 crore was eventually arrived at. 8It boiled down to a deal at the end. Details Dealers demand higher compensation: Claim OMCs are pushing them into a corner August 27: Claiming that oil marketing companies are pushing them into a corner, the Consortium of Indian Petroleum Dealers (CIPD) have reached out to the petroleum ministry, demanding higher compensation by way of an increase in dealer margins. The dealers want the recommendations of a committee set up by the petroleum ministry to review the margins for dealers operating retail outlets The following are the details of what the dealers want: Revise the dealer margin (DM) based on operating cost periodically 8The dealers are demanding that the operating cost be revised periodically, that is, in January and July every year. 8The committee had recommended that the Oil Marketing Companies (OMCs) vary the dealer margins twice a year to take into account variations in minimum wages and power rates, while all other cost components of the operating cost be varied in line with variations in the AICPI, albeit twice a year as well. Variation in product prices should be reflected in the DM 8Further to the recommendations of the committee, the dealers have appealed for the variation in product prices be reflected in the DM. 8The dealers have pointed out that while MS is deregulated and OMCs are effecting the variations of product price from December, 2013 onwards, HSD is not decontrolled, and the price of HSD has been increasing almost on a monthly basis, however, these variations are not considered in the DM. Facility Costs incurred by ROs must be charged 8The committee had recommended that some of the facilities like water, air and toilets which have traditionally been provided free at the RO, must be charged, since ROs incur a cost in maintaining and providing these facilities. 8The dealers are appealing for just the committees recommendation to be implemented. Viable throughput per RO must be maintained 8Although the committee had considered Rs.170 KL/pm to be the viable throughput per RO, the current throughput has dropped significantly, on account of a large number of ROs commissioned by OMCs. 8The dealers are now demanding that the ministry should take corrective action to maintain viability. Cost of operating DG sets to be incorporated in the DM 8In view of the power crises which most states are facing today, the need for using gen sets has increased, and the cost of energy for operating the gen sets is a minimum Rs.30 per unit. 8Since the cost of diesel in on the rise, and this is an unanticipated cost, the dealers have recommended that the costs of operating DG sets be reflected through a revision in the DM.
Posted on: Thu, 28 Aug 2014 10:06:03 +0000