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Tuesday, October 21, 2014

The upstream players will be able to restore their investment plans, mandated to share the subsidy burden-FICCI

FICCI on fuel-pricing reforms 

The industry welcomes the fuel-pricing reforms announced by the Government of India. Given the ballooning budgetary deficit, the imperatives for fiscal consolidation and waning interest of the global investors in the domestic oil and gas sector, it was indeed binding for the government to take the bold decision to deregulate the diesel prices and realign/readjust the domestic gas prices that are remunerative enough for the producers without much detrimental impact on the end consumers. 

With the introduction of market-linked diesel prices, private retailers would be once-again encouraged to chart out strategies to re-enter and make a strong foothold in the market primarily dominated by the state-owned marketing companies, thereby creating greater competition. The state-owned OMCs will be able to improve their liquidity, operational functioning & financial health, better their bottom lines, which otherwise are under severe pressure due to sale of products at subsidized prices. The upstream players will be able to restore their investment plans, mandated to share the subsidy burden. 

It would also play a key role in economizing the utilization of energy resources and curtail black-marketing and adulteration. 

However the moot question that requires urgent clarity is, in case of a high volatility in international oil prices, will the government intervene or let the prices be determined by the market forces? 

FICCI has been, for long also arguing in favour of offering remunerative natural gas prices to the domestic producers, to bring in the much-required technology and risk capital from foreign majors to tap vast unexplored resources in the deep and ultra-deep water frontier basins. This also has the potential to usher in Gas Revolution in India and reduce dependence on any one energy resource. 

Revision in the domestic natural gas prices, would encourage further investments by the IOCs, NOCs and other domestic & overseas private players, provided the government maintains the periodicity of price determination, with no ambiguity. It will usher in coal sector reforms due to competitive pressures & increased availability of natural gas. 

It will also enable revival of gas-based-power projects, which are currently sitting idle due to shortage of gas supplies and encourage, setting up of new gas-based power projects, which will be cleaner & efficient source of power supplies to the nation. 

Also, while the government's decision to offer a premium on the gas price for discoveries in Ultra Deep Water Areas, Deep Water Areas and High Pressure-High Temperature areas, is inspiring, it is unlikely to incentivise the explorers to venture into the domestic E&P sector, unless there is a greater clarity in terms of the quantum and methodology for calculating the premium. 

Quintessential is the need for the government to introduce a reform process for administering the production sharing contracts and its effective implementation.
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