Modi’s new oil policy to fuel political heat

New Delhi: On a day when the nation witnessed general strike to protest against reform policies, Narendra Modi government came out with a new policy in the hydrocarbon sector which is likely to raise political storm. Though the policy is ostensibly aimed at monetising the oil fields lying idle for many years, critics may call it a bonanza for the private sector.

The Union Cabinet on Wednesday gave its approval to the Marginal Fields Policy (MFP), for development of hydrocarbon discoveries made by national oil companies; Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL). These discoveries could not be monetised for many years due to various reasons such as isolated locations, small size of reserves, high development costs, technological constraints and fiscal regime, claims official statement.

Under the new policy, 69 oil fields which have been held by ONGC and OIL for many years, but have not been exploited, will be opened for competitive bidding. When these oilfields could not be exploited by India’s largest oil company that has a global presence like ONGC, how can any other private company can do?

If ONGC and OIL having massive cash reserves could not bear the high-development constraints, how can private sector companies come forward to monetise these marginal oil fields? Surprisingly, technical and financial constraints were also cited as reasons for not monetising them so far. But, ONGC has both technical and fiscal muscle. It has presence in several countries, including Russia.

What technology any other Indian or foreign company has to harness to enable it monetise marginal oil fields is not made clear. In fact, the public sector oil companies spent a lot on these discoveries. Now, the geological data is readily available. Whether or not the ONGC and OIL get any royalty for the discoveries they made while handing over to private players through competitive bidding is also not clear.

The earlier contracts were based on the concept of profit sharing. Under the profit sharing methodology, it became necessary for the Government to scrutinise cost details of private participants and this led to many delays and disputes. Under the new regime, the government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas and other produce.

But the government official statement has not mentioned the share of the government in the revenue. The CAG has earlier brought out the scam in the so-called production sharing contracts as the private companies resorted to artificially inflating the capital costs. But, the fallacy will be known only when the revenue share of the government is known after competitive bidding.

Earlier experiences with revenue sharing contracts showed that governments often ended up getting a pittance share. The second change is that the licence granted to the successful bidder will cover all hydrocarbons found in the field. Earlier, the licence was restricted to one item only (eg. oil) and separate licence was required if any other hydrocarbon, for example, gas was discovered and exploited.

The new policy is likely to shower manifold profits to private bidders as they can now exploit multiple resources. The new policy for these marginal fields also allows the successful bidder to sell at the prevailing market price of gas, rather than at administered price. This has a potential to increase the cost for the consumer. However, the cabinet statement claims that the new policy decision is expected to stimulate investment as well as higher domestic oil and gas production.